An investment project requires a net investment of $100,000. The project is expe
ID: 2755477 • Letter: A
Question
An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine whether you would accept or reject the project using the discounted payback period method. The company rejects projects that exceed a discounted payback period of over 3 years.
4.94 years, Reject the project
2.5 years, accept 4.09 years,
accept 1.43 years,
accept You cannot calculate discounted payback from the information given.
Explanation / Answer
Calculation of discounted payback period :
Year
Cash flows (CF)
PVF (12%)
PV = CF*PVF
Cumulative PV
0
$ (100,000.00)
1.00000
$ (100,000.00)
$ (100,000.00)
1
$ 28,000.00
0.89286
$ 25,000.00
$ (75,000.00)
2
$ 28,000.00
0.79719
$ 22,321.43
$ (52,678.57)
3
$ 28,000.00
0.71178
$ 19,929.85
$ (32,748.72)
4
$ 28,000.00
0.63552
$ 17,794.51
$ (14,954.22)
5
$ 28,000.00
0.56743
$ 15,887.95
$ 933.73
Discounted payback period = 4 years + 1 *(14954.22/ 15887.95)
Discounted payback period = 4.94 years
Discounted payback period is over 3 years, hence we should Reject the Project
Calculation of discounted payback period :
Year
Cash flows (CF)
PVF (12%)
PV = CF*PVF
Cumulative PV
0
$ (100,000.00)
1.00000
$ (100,000.00)
$ (100,000.00)
1
$ 28,000.00
0.89286
$ 25,000.00
$ (75,000.00)
2
$ 28,000.00
0.79719
$ 22,321.43
$ (52,678.57)
3
$ 28,000.00
0.71178
$ 19,929.85
$ (32,748.72)
4
$ 28,000.00
0.63552
$ 17,794.51
$ (14,954.22)
5
$ 28,000.00
0.56743
$ 15,887.95
$ 933.73
Discounted payback period = 4 years + 1 *(14954.22/ 15887.95)
Discounted payback period = 4.94 years
Discounted payback period is over 3 years, hence we should Reject the Project
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