Discounted pay back method which is the time needed to pay back the original inv

Question

Discounted pay back method which is the time needed to pay back the original investment in terms of discounted future cash flows.

Define the technique.

Discuss the difference between the two methods.

Analyze the numbers in the problem using an excel spreadsheet.

Use a 10% discount rate.

You must use Excel formulas which are on the ribbon in Excel marked Fx to make your calculations whenever possible.

Carry out the answers at least two decimal places

Year Project A Project B Project C 2018 ($3,000,000) ($3,000,000) ($3,200,000) 2019 $0 $975,000 $985,000 2020 $600,000 $975,000 $925,000 2021 $900,000 $975,000 $1,000,000 2022 $3,000,000 $1,000,000 $950,000

Explanation / Answer

When an individual or an organization has to find out whether undertaking a project is profitable or not, the discounted payback technique is used. The expected future cash flows are discounted back to the present time. It helps to find out the time required to cover the initial investment made.

Thus project B is the best choice as it has the lowest discounted payback period.

Payback Period Method Discounted Payback Period Method It is a traditional method of investment decision making It is a modern technique of investment decision making It does not take into account the time value of money It takes into account the time value of money It is easier to calculate It is cumbersome to compute

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