Question

Answer Q1-Q3

Assume that the discount rate of Project B is 15%. Given the following projected cashflow:

Time	Cashflow	DCF
Year 0	-1500	?
Year 1	1000	869.57
Year 2	800	604.91
Year 3	700	460.26
Year 4	500	285.88

Q1: The PBP of the project is __

		a)1.625
		b)2.125
		c)1.535
		d)1.5

Q2) The DPBP of the project is __ .

		a)1.75
		b)2.58
		c)3.04
		d)2.06

Q3) Which of the following statement is correct?

		a)If the discount rate increases, the PBP and DPBP will both decrease.
		b)If the discount rate decreases, the DPBP will become shorter than PBP.
		c)If the discount rate decreases, the PBP will stay the same and DPBP will decrease.
		d)If the discount rate increase, the PBP and DPBP will both stay the same.

Answer 1

1. Payback Period =Year before complete recovery + Uncovered cost /Cash flow in that year =1+(1500-1000)/800 = 1.625 years
(Option a is correct option)

2. Discounted Payback Period =Year before complete recovery + Uncovered cost due to discounted cash flows/Discounted Cash flow in that year =2+(1500-869.57-604.91)/460.26 = 2.055 or 2.06 years
(Option d  is correct option)

3. Option c i correct
Because discount rate has no impact on the payback period , however the DPBP will decrease because it decreases with decrease in discount rate