Question

Dobson Enterprises is considering a project that is expected to cost $925 today and produce cash flows of $525 (year one), $485 (year two), $445 (year three), and $405 (year four). What is the project's discounted payback if the WACC is 10%? A) 2.40 years B) 2.14 years C) 2.25 years D) 1.95 years E) 1.86 years

Answer 1

Year	Cash flows	Present value@10%	Cumulative Cash flows
0	(925)	(925)	(925)
1	525	477.27	(447.73)
2	485	400.83	(46.9)
3	445	334.34	287.44
4	405	276.62	564.06(Approx)

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(46.9/334.34)

=2.14 years(Approx)