Question

# Sky Enterprises is considering an investment project with the following cash flows: Year                   Cash Flow 0      &nbs

Sky Enterprises is considering an investment project with the following cash flows:

Year                   Cash Flow

0                      -\$100,000

1                         30,000

2                         40,000

3                         60,000

4                         90,000

The company has a 7% cost of capital. What is the project’s discounted payback period?

A. 2.76 years
B. 1.86 years
C. 1.86 years
D. 1.67 years
E. more than 3 years

The discounted payback period is computed as shown below:

Cumulative discounted cash flows from year 1 to year 2 is computed as follows:

= \$ 30,000 / 1.071 + \$ 40,000 / 1.072

= \$ 62,974.93231

Cumulative discounted cash flows from year 1 to year 3 is computed as follows:

= \$ 30,000 / 1.071 + \$ 40,000 / 1.072 + \$ 60,000 / 1.073

= \$ 111,952.8049

It means that the discounted payback period lies between year 1 and year 3, since the initial investment of \$ 100,000 is recovered between them. So, the discounted payback period will be computed as follows:

= 2 years + Balance investment to be recovered / Year 3 discounted cash flow

= 2 years + [ (\$ 100,000 - \$ 62,974.93231) / ( \$ 60,000 / 1.073) ]

= 2 years + \$ 37,025.06769 / \$ 48,977.87261

= 2.76 years Approximately

Feel free to ask in case of any query relating to this question

#### Earn Coins

Coins can be redeemed for fabulous gifts.