Question

In: Finance

Estimated cash flows appear below for an investment project. The project's required rate of return (RRR)...

Estimated cash flows appear below for an investment project. The project's required rate of return (RRR) is 11.40%. What is the discounted payback period for the project in years? Cash flows after Year 0 are assumed to be end-of-year cash flows. Year 0 cash flow = -67,000 Year 1 cash flow = 17,000 Year 2 cash flow = 20,000 Year 3 cash flow = 27,000 Year 4 cash flow = 30,000 Year 5 cash flow = 24,000 Select one: a. 3.37 b. 3.83 c. 4.09 d. 3.06 e. 2.87 f. 3.25

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Expert Solution

Based on the given data, pls find below workings:

Answer: (b) Discounted Payback period is 3.83 years

Computation of Normal / Discounted Pay Back Period: Here, the period is computed for each project, based on cumulative normal /discounted cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years.


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