Question

Janice is considering an investment costing $65,500 with cash flows of $48,700 in Year 2, $36,500 in Year 3, and $19,900 in Year 4. The discount rate is 11 percent, and the required discounted payback period is 3 years. Should this project be accepted or rejected? What is the discounted payback period?

Multiple Choice

• Rejected 2.82 years

• Accepted; 1.97 years

• Accepted; 2.38 years

• Rejected; 3.77 years

• Accepted; 2.97 years

Answer 1

Accepted; 2.97 years

Year	Cash Flow	Discount factor	Discounted Cash flow	Cumulative Discounted Cash flow
a	b	c=1.11^-a	d=b*c	e
0	$       -65,500	1.0000	-65,500	$ -65,500
2	48,700	0.8116	39,526	-25,974
3	36,500	0.7312	26,688	714
4	19,900	0.6587	13,109	13,823
Discounted payback	=	2+(25974/26688)
	=	2.97	Years
Since discounted payback period is within the range of maximum allowable payback period.Hence, it is acceptable.