Question

Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7 percent and the maximum allowable discounted payback period is three years. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Project C
Time:	0	1	2	3	4	5
Cash flow:	–$2,400	$1,040	$900	$940	$580	$380

Should the project be accepted or rejected?

Discounted payback period______ years

• accepted

• rejected

Answer 1

Discounted Payback Period for the Project C

Year	Cash Flows ($)	Present Value Factor at 7%	Discounted Cash Flow ($)	Cumulative net discounted Cash flow ($)
0	-2,400.00	1.000000	-2,400.00	-2,400.00
1	1,040.00	0.934579	971.96	-1,428.04
2	900.00	0.873439	786.09	-641.94
3	940.00	0.816298	767.32	125.38
4	580.00	0.762895	442.48	567.86
5	380.00	0.712986	270.93	838.79

Discounted Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2 Year + ($641.94 / $767.32)

= 2 Year + 0.84 Years

= 2.84 Years

“Hence, the Discounted Payback Period for the Project C will be 2.84 Years”

DECISION

The Project C should be accepted, since the discounted payback period for the project (2.84 Years) is less than the maximum allowable discounted payback period (3 Years).

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.