In: Finance
Blossom Corp. is investing in a new computer system. The new system costs $1,250,000 in the current year, but will generate an annual cash inflow of $350,000 for the next six years. Assuming the company’s cost of capital is 12%, the discounted payback period of this project is closest to _______.
Group of answer choices
a. 4 years
b. 3 years
c. 5 years
d. 6 years
Discounted cash flow of each year = cash flow / (1 + cost of capital)n
where n = number of years after which cash flow occurs
Discounted payback period is the time taken for the cumulative cash flows to equal zero
Discounted payback period = 4 + (discounted cash flow required in year 5 for cumulative discounted cash flows to equal zero / year 5 discounted cash flow) = 4 + ($186,928 / $198,599) = 4.940 years
the discounted payback period of this project is closest to (c) 5 years