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2 June, 18:54

You are considering an investment in a startup that will cost $100,000 but you will receive a cash inflow of $25,000 every year for 5 years from the sale of products the startup will manufacture. The required return is 9%, and payback cutoff is 5 years. a) What is the payback period

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  1. 2 June, 20:04
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    Simple payback is 4 years

    Total discounted Payback is more than the 5 years which is the payback cutoff period.

    Explanation:

    Payback period is the time period in which the project recovers the initial cost incurred. Lower the payback period the more beneficial will be the project.

    Simple payback = $100,000 / $25,000 = 4 years

    Discounted Payback

    Discounted payback is calculated by using the present value of future cash flows.

    Total discounted cash flows = 22935.78 + 21042.0 + 19304.59 + 17710.63 + 16248.28 = 97,241.28

    As sum of all cash flows are less than the initial investment so, total discounted Payback is more than the 5 years which is the payback cutoff period.
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