Question

Suppose a company had an initial investment of $50,000. The cash flow for the next five years are $14,000, $13,000, $13,000, $19,000, and $14,000, respectively. The interest rate is 5%. Enter your answer rounded to 2 DECIMAL PLACES.

What is the discounted payback period?  

If the firm requires a discounted payback periods 4 years or less, will the project be accepted?

Yes

OR.

No

Answer 1

Calculation of discounted pay back period:

Calculation of discounted and cumulative cashflows:

Year. Cashflow. PVF@5%. Pv of cashflow

1. $14,000. 0.95. $13,300

2. $13,000. 0.91. $11,830

3. $13,000. 0.86. $11,180

4. $19,000. 0.82. $15,580

5. $14,000. 0.78. $10,920

Cumulative cashflow

$13,300

$25,130

$36,310

$51,890

$62,810

Discounted payback period =

Years before full recovery+(unrecovered cost at the start of the year/cashflow during the year)

Years before full recovery = 3

Unrecovered cost at the start of the year = $13,690 i.e.($50,000-36,310)

Cash flow during the year = $15,580

Substitute values in formula

Discounted payback period :

3+($13,690/$15,580) = 3.88 years

So discounted payback period of the project = 3.88 years

b. If the firm requires discounted payback period of 4 yrs or less then it is advisable to accept the project, because projects discounted payback period is 3.88 yrs which is less than 4 yrs.

So the answer is YES.

.