Question

A proposed project has the following costs and benefits: Year Costs Benefits 0 2,000 1 1,000...

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

Homework Answers

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.

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