Question

The discounted payback period of a project will decrease whenever the...

a. initial cash outlay for the project is increased.

b. discount rate applied to the project is decreased.

c. costs of the fixed assets utilized in the project increase.

d. amount of each projected cash inflow is decreased.

Per my Professor, answers c and d are incorrect

   

Answer 1

Correct option is (b)

Explanation :- Discounted payback period is the time required to recover initial investment using discounted annual cash inflows.

Hence ,If annual cash inflows are higher or increase then project will take less time to recover initial investment and similarly if Initial outlay or cash outflow of project will decrease then we will have lower amount which is required to be recovered using discounted annual cash inflows and hence discounted payback period will decrease

Hence if discount rate is decreased then discounted cash flows will increase and hence discounted payback period will decrease.