Question

Compute the discounted payback statistic for Project C if the appropriate cost of capital is 8 percent and the maximum allowable discounted payback period is three years. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project C Time: 0 1 2 3 4 5 Cash flow: –$1,900 $840 $750 $790 $480 $280

Answer 1

Answer :

Discounted Value of cash inflows :

$ 840 = $ 840 / 1.08 = $ 777.78

$ 750 = $ 750 / ( 1.08 )^2 = $ 643.00

$ 790 = $ 790 / ( 1.08 )^3 = $ 627.13

Inflow at the end of year 2 = $ 777.78 + $ 643.00 = $ 1,420.78

Remaining balance to be covered in year 3 = $ 1,900 - $ 1,420.78 = $ 479.22

Time required to recover the amount in year 3 = $ 479.22 / ( $ 627.13 / 12 ) = 9.1697735 months (or) 0.76415 years

So, Discounted payback period = 2 years + 0.76415 years

= 2.76415 years (or) 2.76 years.