In: Finance
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
Time: 0 1 2 3 4 5
Cash flow –$231,000 $65,400 $83,600 $140,600 $121,600 $80,800
Discounted payback______years
Ans 3.18 years
Year | Project Cash Flows (i) | DF@ 11% | DF@ 11% (ii) | PV of Project A ( (i) * (ii) ) | Cumulative Cash Flow |
0 | -231000 | 1 | 1 | (2,31,000.00) | (2,31,000.00) |
1 | 65400 | 1/((1+11%)^1) | 0.901 | 58,918.92 | (1,72,081.08) |
2 | 83600 | 1/((1+11%)^2) | 0.812 | 67,851.64 | (1,04,229.45) |
3 | 140600 | 1/((1+11%)^3) | 0.731 | 1,02,805.51 | (1,423.94) |
4 | 121600 | 1/((1+11%)^4) | 0.659 | 80,101.69 | 78,677.75 |
5 | 80800 | 1/((1+11%)^5) | 0.593 | 47,950.87 | 1,26,628.62 |
NPV | 1,26,628.62 | ||||
Discounted Payback Period = | 3 years + 1423.94/80101.69 | ||||
3.18 years |