Question
In: Finance
Company is planning on investing in a new project. This will involve the purchase of some...
Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The company expect cash inflows from this project as detailed below:
Year One Year Two Year Three Year Four
$200,000 $225,000 $275,000 $200,000
The appropriate discount rate for this project is 12%.
The discounted payback period for this project is closest to:
Answer
2.1 years
3 years
2.0 years
2.5 years
Solutions
Expert Solution
Ans 2.5 years
| Year | Project Cash Flows (i) | DF@ 12% | DF@ 12% (ii) | PV of Project A ( (i) * (ii) ) | Cumulative Cash Flow |
| 0 | -450000 | 1 | 1 | (4,50,000.00) | (4,50,000.00) |
| 1 | 200000 | 1/((1+12%)^1) | 0.893 | 1,78,571.43 | (2,71,428.57) |
| 2 | 225000 | 1/((1+12%)^2) | 0.797 | 1,79,368.62 | (92,059.95) |
| 3 | 275000 | 1/((1+12%)^3) | 0.712 | 1,95,739.57 | 1,03,679.62 |
| 4 | 200000 | 1/((1+12%)^4) | 0.636 | 1,27,103.62 | 2,30,783.23 |
| Total | 2,30,783.23 | ||||
| Discounted Payback Period = | 2 years + 92059.95/195739.57 | ||||
| 2.5 years | |||||
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