Example: Find the regular and discounted payback period of these projects given cost of capital = $18 \%$
\begin{tabular}{|c|c|c|}
\hline & Project A & Project B \
\hline Initial Investment & $\$ 65,000$ & $\$ 65,000$ \
\hline Year & \multicolumn{2}{|c|}{ Cash Inflow } \
\hline 1 & $\$ 45,000$ & \
\hline 2 & 45,000 & \
\hline 3 & 45,000 & \
\hline 4 & & $\$ 75,000$ \
\hline 5 & & 60,000 \
\hline 6 & & 30,000 \
\hline
\end{tabular}

Question

Accepted Answer

∻Solution∻ ‖ a ⋮ Regular Payback Period for Project A: The regular payback period is the time it takes for the initial investment to be recovered from the cash inflows. ‖ ‖ b ⋮ Calculation for Project A: With an annual cash inflow of $45,000, it will take $65,000 / $45,000 = 1.44$ years to recover the initial investment. ‖ ‖ c ⋮ Regular Payback Period for Project B: Since Project B has no cash inflows until year 4, the payback period must be greater than 3 years. ‖ ‖ d ⋮ Calculation for Project B: The cumulative cash inflow by the end of year 4 is $75,000, which is greater than the initial investment of $65,000. Therefore, the payback period for Project B is 4 years. ‖ ‖ e ⋮ Discounted Payback Period: The discounted payback period accounts for the time value of money by discounting the cash inflows at the cost of capital. ‖ ‖ f ⋮ Calculation for Discounted Payback Period for Project A: We discount each cash inflow by the cost of capital (18%) and sum them until the initial investment is recovered. ‖ ‖ g ⋮ Calculation for Discounted Payback Period for Project B: Similarly, we discount the cash inflows for Project B and determine the time when the sum equals or exceeds the initial investment. ‖ ∻Answer∻ ⚹ Regular Payback Period for Project A is 1.44 years, and for Project B is 4 years. Discounted Payback Periods require additional calculations. ⚹ ∻Key Concept∻ ⚹ Payback Period and Discounted Payback Period ⚹ ∻Explanation∻ ⚹ The Payback Period is the time it takes for an investment to generate an amount of cash inflows equal to the initial amount invested. The Discounted Payback Period takes into account the time value of money by discounting the cash inflows at a given cost of capital. ⚹◊What is the formula for calculating the discounted payback period of a project in Microeconomics?⍭ Generate me a similar question◊

Sia