Question

A proposed project has the following costs and benefits:

Year	Costs	Benefits
0	2,000
1		1,000
2		1,000
3		1,000
4		2,000
5		2,000

Assuming an interest rate of 10%, the project's simple payback period is most nearly _________.

	A.	2 years
	B.	4 years
	C.	6 years
	D.	5 years
	E.	7 years

Using the information in Problem #3 and linear interpolation, the project's discounted payback period is most nearly ___________.

	A.	3.62 years
	B.	2.33 years
	C.	2.05 years
	D.	3.41 years
	E.	None of the above

Answer 1

Ques 1 ) Part A 2 years

The benefits in 2 years(1000+1000) will become equal to the cost (2000).

Ques 2 ) Part B. 2.33 years

Formula for discounted period = Income/(1+r)^t

Year	Income	Discounted value	Cummulative Value	Balance
1	1000	909.0909091	909.0909091	1090.90909
2	1000	826.446281	1735.53719	264.46281
3	1000	751.3148009	2486.851991	-486.85199

Discounted Payback = 2+264/752 = 2.35 years, which is nearest to part B.