Question

In: Finance

A team specializing in the clinical care, was acquired for $300,000 and is expected to generate...

A team specializing in the clinical care, was acquired for $300,000 and is expected to generate savings of $111,837.50 per year, while in operation. Applying an interest rate of 12% per annum, determine what the period of investment recovery would be considering the value of the money over time ("discounted payback period"). Round up your answer to the next integer.

Select one:
a. 3
b. No correct answer is provided.
c. 4
d. 6
e. 7

Solutions

Expert Solution

The discounted payback period for the project

Year

Annual cash flows ($)

Present Value Factor (PVF) at 12.00%

Discounted cash flows ($)

[Annual cash flow x PVF]

Cumulative net discounted Cash flow ($)

0

(300,000.00)

1.0000000

(300,000.00)

(300,000.00)

1

111,837.50

0.8928571

99,854.91

(200,145.09)

2

111,837.50

0.7971939

89,156.17

(110,988.92)

3

111,837.50

0.7117802

79,603.72

(31,385.20)

4

111,837.50

0.6355181

71,074.75

39,689.56

5

111,837.50

0.5674269

63,459.60

103,149.16

Discounted Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 3.00 Years + ($31,385.20 / $71,074.75)

= 3.00 Years + 0.44 Years

= 3.44 Years or

= 3 Years (Rounded to the whole year)

Therefore, the discounted payback period for the project will be (a). 3 Years

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.


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