Blossom Corp. is investing in a new computer system. The new system costs $1,250,000 in the...

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

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago

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