Question

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Please add the explanation. 3.A project costs $475 and has cash flows of $100 for the...

Please add the explanation.

3.A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. If the discount rate is 10%, what is the discounted payback period?

A) The project never pays back on a discounted basis

B) 5 years

C) 6 years

D) 7 years

E) 8 years

Solutions

Expert Solution

Total project life is given as 8 years. With the given discount rate of 10%, the project never pays back on a discounted basis. Cumulative present worth of cash flows, after the project period, is negative at ($12.71). This is because IRR of the project is 9.21% which is less than the discount rate of 10% specified.

The answer is option A.

Details of calculation as follows:

jeff jeffy answered 1 year ago
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