Question

Masulis Inc. is considering a project that has the following cash flow and WACC data.  What is the project's discounted payback? WACC:  15.00% Year                            0                1                2                3                4     Cash flows              -$750         $525          $485          $445          $405 Hint: Discounted Payback period: The number of years required to recover a project’s cost. Cumulative cash flow computation takes into account the time value of money by using discounted cash flows. Group of answer choices 1.68 years 1.99 years 1.80 years 2.22 years 2.44 years

Answer 1

Given cash flow about a project of Masulis Inc,,

WACC = 15%

Its cumulative cash flows are also calculated as below:

cumulative cash flow = previous year discounted cumulative cash flow + current year cash flow

Discounted cumulative cash flow = Cumulative cash flow/(1+WACC)^year

Year	Cash flow	Cumulative Cash Flow	Discounted Cumulative Cash flow
0	$              -750	$                -750	$                                     -750
1	$               525	$                -225	$                                     -196
2	$               485	$                 289	$                                       219
3	$               445	$                 664	$                                       436
4	$               405	$                 841	$                                       481

Discounted Payback period of a project = year before the discounted cumulative cash flow turns positive + (discounted cumulative cash flow of period before recovery/cumulative cash flow of recovery period)

So, here Payback period = 1 + 196/289 = 1.68 years

Option A is correct.