In: Finance
A team specializing in the clinical care, was acquired for $300,000 and is expected to generate savings of $111,837.50 per year, while in operation. Applying an interest rate of 12% per annum, determine what the period of investment recovery would be considering the value of the money over time ("discounted payback period"). Round up your answer to the next integer.
Select one:
a. 3
b. No correct answer is provided.
c. 4
d. 6
e. 7
The discounted payback period for the project
Year |
Annual cash flows ($) |
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.