Question
A new bottling machine will cost $21,000 initially. The machine will produce after-tax cash flows of $4,000 in the first year and $8,000 each year
A new bottling machine will cost $21,000 initially. The machine will produce after-tax cash flows of $4,000 in the first year and $8,000 each year thereafter for 4 years. Your company's cost of capital is 5%.
Part 1 What is the payback period for this project? 3.125
Year 0 1 2 3 4 5 Cash flow -21,000 4,000 8,000 8,000 8,000 8,000 Cumulative cash flow -21,000 -17,000 -9,000 -1,000 7,000 15,000 The project has not paid back its initial costs after 3 years (the balance is still negative), but it has after 4 years (the balance is positive). The payback period is thus between 3 and 4 years. Assuming that cash flows occur evenly throughout the year, the payback period is 3 + 1,000 / 8,000 = 3.13 years. Correct
Part 2
What is the discounted payback period for this project
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