Question
In: Finance
Gem E. Fallon LLP (GEF) is currently evaluating an investment in a new comedy club. The...
Gem E. Fallon LLP (GEF) is currently evaluating an investment in a new comedy club. The club is expected to last for 4 years and generate a CF1 = $11,000, CF2 = $9,680, CF3 = $10,648, and CF4 = $58,564. The initial outlay is $20,000. Using a required return of 10%, calculate the discounted payback period for GEF's comedy club. (All answers below are expressed in years.)
|
(a) 2.19 |
||
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(b) 2.25 |
||
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(c) 2.00 |
||
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(d) 1.93 |
||
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(e) 3.00 |
Solutions
Expert Solution
| Year | cash flow [A] | Discount factor [B] | Discounted cash flow [A*B] | Cummulative discounted cash flow |
| 0 | -20000 | 1 | -20000 | -20000 |
| 1 | 11000 | .90909 | 9999.99 | -10000.01 [-20000+9999.99] |
| 2 | 9680 | .82645 | 8000.04 | -1999.97 [-10000.01+8000.04] |
| 3 | 10648 | .75131 | 7999.95 | 5999.98 [-1999.97+7999.95] |
| 4 | 58564 | .68301 | 39999.80 |
45999.78 [5999.98+39999.98] |
**Discount factoris calculating using the formula 1/(1+i)^n or can be find from the present value table at 10% for 1,2,3,4
Discounted payback period = Year up to which cummulative discounted cash flow is negative +[ discounted cummulative cash flow of that period /discounted cash flow of next year]
= 2+ [1999.97/7999.95]
= 2 + .25
= 2.25 years
correct option is " b"
jeff jeffy answered 2 years agoRelated Solutions
Gem E. Fallon LLP (GEF) is currently evaluating an investment in a new comedy club. The...
Gem E. Fallon LLP (GEF) is currently evaluating an investment in
a new comedy club. The club is expected to last for 4 years and
generate a CF1 = $11,000, CF2 = $9,680, CF3 = $10,648, and CF4 =
$58,564. The initial outlay is $20,000. Using a required return of
10%, calculate the discounted payback period for
GEF's comedy club. (All answers below are expressed in years.)
(a) 2.19
(b) 2.25
(c) 2.00
(d) 1.93
(e) 3.00
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