Task: Payback and Discounted Payback
Problem 1: A company is determining whether or not to invest in a project of limited duration. The cash flows that correspond to the project are as follows:
Annual Cash Flows
Year 1 $400,000
Year 2 $400,000
Year 3 $400,000
Year 4 $400,000
Year 5 $400,000
The payback period has been determined to be three and one-half years. What is the amount of the initial investment?
Problem 2: A company is determining whether or not to invest in a project of limited duration. The cash flows that correspond to the project are as follows:
Annual Cash Flows
Year 1 $300,000
Year 2 $250,000
Year 3 $100,000 (Total cumulative amount = $650,000)
Year 4 $200,000
Year 5 $250,000
The initial investment required to start this project is $700,000.
1) What is the payback period?
2) What is the discounted payback period, assuming that the required cost of capital is 10 percent? (Round your cumulative cash flows to the nearest whole number. Round your final answer to two decimal points.)