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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

jeff jeffy answered 4 months ago
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