Question

AS A CAPITAL BUDGETING DIRECTOR OF DAYTON CORPORATION, YOU ARE EVALUATING TWO PROJECTS WITH THE FOLLOWING NET CASH FLOWS: COST OF CAPITAL IS 12%

YEAR	0	1	2	3	4
X	$-2,000	$250	$380	$480	$2,000
Y	$-1,800	$1,600	$600	$200	$420

Calculate Project X's DISCOUNT PAYBACK PERIOD (DPB)

A. 1.57

B. 1.78

C. 3.47

D. 3.89

E. 5.22

Answer 1

Year	0	1	2	3	4
Cashflow(in $)	(2,000)	250	380	480	2,000
PVF @12%	1	0.893	0.797	0.712	0.636
Discounted Cashflow (Cash flow * PVF)	(2,000)	223	303	342	1,272
Cumulative Cashflow(in $)	(2,000)	(1,777)	(1,474)	(1,132)	140

Discounted Payback Period =  A + (B/C)

where

A - Last period with a negative discounted cumulative cash flow = 3

B - Absolute value of discounted cumulative cash flow at the end of the period A above = 1132

C -  Discounted cash flow during the period after A. = 1272

Discounted Payback Period =  A + (B/C)

= 3 + (1132/1272)

= 3 + .89

= 3.89 (D)