Answer:
Simple Payback period is 2.52 years.
Discounted Payback period is 2.97 years
Explanation:
Payback period is the number of years that a project takes to recover the project's initial investment.
Simple Payback
Project A
Time: 0 1 2 3 4 5
Cash flow –$1,500 $550 $630 $620 $400 $200
Payback period = 550/550 + 630/630 + (1500-550-630)/620 = 2.52 years
Payback period = Approximately 2.52 years
In simple term it will take 2.52 years to recover the initial investment.
Discounted payback
Project A
Time: 0 1 2 3 4 5
Cash flow –$1,500 $550 $630 $620 $400 $200
PV @ 9% –$1,500 $505 $530 $479 $283 $130
Payback period = 505/505 + 530/530 + (1500-505-530)/479 = 2.97 years
Payback period = Approximately 2.97 years
It will take about 2.97 years to recover the initial investment of $1,500 using discount rate of 9%
