Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$251,835	–$15,247
1	25,100	4,828
2	55,000	8,358
3	50,000	13,472
4	385,000	8,102

  

Whichever project you choose, if any, you require a 6 percent return on your investment.

a.What is the discounted payback period for Project A?

b.What is the discounted payback period for Project B?

Answer 1

Answer :-

Project A
Year	Cash OutFlows	PVF@ 6%	PV
0	-2,51,835.00	1.00	-2,51,835.00
Year	Cash IntFlows	PVF@ 6%	PV	Cumulative PV
1	25,100.00	0.94	23,679.25	23,679.25
2	55,000.00	0.89	48,949.80	72,629.05
3	50,000.00	0.84	41,980.96	1,14,610.01
4	3,85,000.00	0.79	3,04,956.06	4,19,566.07
	NPV		1,67,731.07
Discounted Payback period			3 + (137224.99 / 304956.06)* 1				3.45	Years
Project B
Year	Cash OutFlows	PVF@ 6%	PV
0	-15,247.00	1.00	-15,247.00
Year	Cash IntFlows	PVF@ 6%	PV	Cumulative PV
1	4,828.00	0.94	4,554.72	4,554.72
2	8,358.00	0.89	7,438.59	11,993.31
3	13,472.00	0.84	11,311.35	23,304.66
4	8,102.00	0.79	6,417.54	29,722.20
	NPV		14,475.20
Discounted Payback period			2 + (3253.69 / 11311.35)* 1				2.288	Years
Here the project B is better on the basis of DPBP as the DPBP is lower the better
Discounted PBP shows the period of recovery of the initial amount invested