Question

In: Finance

Nobel Tech Inc. is building a new production line. The cost of the production line is...

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

Solutions

Expert Solution

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


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