Question

1. A company has the following pattern of cash flow for a project:

Year	Cash flow
	£
0	(70,000)
1	40,000
2	20,000
3	30,000
4	5,000
5	40,000

The company uses a discount rate of 10%. In what year does discounted payback occur?

A        Year 2

B        Year 3

C        Year 4

D        Year 5

Answer 1

ANS: Calculation of Discounted Payback period

Year	Cash Inflow	PVF @ 10%	PV of Cash Flow
1	40000	.909	36360
2	20000	.826	16520
3	30000	.751	22530
4	5000	.683	3415
5	40000	.621	24840
	Total PV of Cash Inflow		103665

Cash Out Flow at Year 0 = 70000

Cumulative PV of Cash Flow till year 2 = 52880 (36360 + 16520)

So, Unrecouped outflow = 70000 - 52880

= 17120

In 3rd year, Net present value = 22530

Thus, Discounted payback Period = 2 year + 17120 / 22530

= 2.759 years

or, 3 years

The Correct answer would be 3 years i.e OPTION B

Note :- Discounted Cash Inflow = Actual Cash Inflow / (1+i)^n

Where, i = discount rate

n = period to which cash inflow relates