Question

A project has an initial cost of $14,500 and produces cash inflows of $4,600, $6,100, and $8,500 over the next three years, respectively.

What is the discounted payback period if the required rate of return is 15 percent?

a. 2.36 years

b. 2.45 years

c. 2.55 years

d 2.62 years

e. never

Answer 1

Calculation of discounted payabck period

Present value = 4,600 / (1 + 0.15)¹ = 4,000

Present value = 6,100 / (1 + 0.15)² = 4,612.48

Present value = 8,500 / (1 + 0.15)³ = 5,588.89

Cumulative cash flow for year 0 = -$14,500

Cumulative cash flow for year 1 = -14,500 + 4,000 = -10,500

Cumulative cash flow for year 2 = -10,500 + 4,612.48 = -5,887.52

Cumulative cash flow for year 3 = -5,887.52 + 5,588.89= -298.63

OR it can be shown in the format as shown below÷

Discounted Payback Period Calculation
Year	CF	NCF	PV Factor	DCF	CCF
0	$-14,500	$-14,500	1	$-14,500	$-14,500
1	$4,600	$-9,900	0.87	$4,000	$-10,500
2	$6,100	$-3,800	0.76	$4,612.48	$-5,887.52
3	$8,500	$4,700	0.66	$5,588.89	$-298.63

With the current discount rate of 15%, the Investment won't pay back in 3 years.

The correct answer is option e i.e. never

Note÷

1.As nothing is mentioned in the question about rounding off, the answer are rounded off to total decimals.

2. Amt are in $