JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial...

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years?

Expert Solution


Project			Discount rate=	0.152
Year	Cash flow stream	Cumulative cash flow	Discounting factor	Discounted CF	Cumulative cash flow	Cumulative discounted CF
0	-309000	-309000	1	-309000	-309000	-309000
1	47000	-262000	1.152	40798.61	-262000	-268201
2	198000	-64000	1.327104	149197	-64000	-119004
3	226000	162000	1.528824	147826.1	162000	28821.72
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-119004.34))/(28821.72-(-119004.34))
2.81 Years

Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor

Reject as discounted payback is more than 2.5 years

jeff jeffy answered 6 months ago

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