Question

Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.00%

Year 0 1 2 3 4

Cash flows -$1,300 $525 $485 $445 $405

Group of answer choices

3.32 years 2.62 years 2.75 years 3.42 years

Answer 1

Discounted Pay Back Period

WACC = 10%

Investment = 1300

Year	Inflow	PV factor @ 10%	Present Value
1	525	0.9091	477
2	485	0.8264	401
3	445	0.7513	334
4	405	0.6830	277

Discounted payback period method considers the discounted cash flow to compute the period required to cover the initial investment.

Sum of inflows of 3 years = 477 + 401 + 334 = 1212

To cover the investment ie, 1300, the balance required is = 1300 - 1212 = 88

Therefore 88 is to be taken from 4th year ie 88/277 = 0.32

Therefore Discounted payback period = 3 years + 0.32 = 3.32 years