In: Finance
Nobel Tech Inc. is building a new production line. The cost of the production line is $3 million in the current year and $2 million in the following year. The production line is expected to bring in cash inflows of $1.6 million in year 2, and $2 million each year from year 3 to year 7. The company uses a cost of capital of 10% on all the projects.
The discounted payback period of this project is ____________.
Group of answer choices
a. 4.5 years
b. 6.5 years
c. 3.7 years
d. 5.5 years
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Cashflow(in $) | (3,000,000) | (2,000,000) | 1,600,000 | 2,000,000 | 2,000,000 | 2,000,000 | 2,000,000 | 2,000,000 |
PVF @10% | 1 | 0.909 | 0.826 | 0.751 | 0.683 | 0.621 | 0.564 | 0.513 |
Discounted Cashflow (Cash flow * PVF) | (3,000,000) | (1,818,182) | 1,322,314 | 1,502,630 | 1,366,027 | 1,241,843 | 1,128,948 | 1,026,316 |
Cumulative Cashflow(in $) | (3,000,000) | (4,818,182) | (3,495,868) | (1,993,238) | (627,211) | 614,631 | 1,743,579 | 2,769,895 |
Discounted Payback Period = A+(B/C)
where
A - last period containing negative cumulative discounted cash flow = 4
B - absolute value of cumulative cash flow in A = 627211
C - discounted cash flow during the period after A = 2000000
Discounted Payback Period = 4+(627211/1241843)
= 4.5 years