Question

Suppose a company has proposed a new 5-year project. The project has an initial outlay of...

Suppose a company has proposed a new 5-year project. The project has an initial outlay of $169,000 and has expected cash flows of $38,000 in year 1, $45,000 in year 2, $60,000 in year 3, $69,000 in year 4, and $77,000 in year 5. The required rate of return is 13% for projects at this company. What is the discounted payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

Homework Answers

Answer #1
Year Cash flows Present value@13% Cumulative Cash flows
0 (169000) (169000) (169000)
1 38000 33628.32 (135371.68)
2 45000 35241.60 (100,130.08)
3 60,000 41583.01 (58547.07)
4 69000 42318.99 (16228.08)
5 77000 41792.52 25564.44(Approx).

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4+(16228.08/41792.52)

=4.4 years(Approx).

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