Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the maximum allowable payback period is four years. (Round your answer to 2 decimal places.)

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%