(Toolkit – Decision Rules – PBAK, IRR, NPV) Calculate Discounted Payback – After

Question

(Toolkit – Decision Rules – PBAK, IRR, NPV) Calculate Discounted Payback – After a change of policy, your boss now states that the payback period is still less than 3 years but that cash flows must be discounted at 10%. Still assume $5K expenditure on a new piece of equipment that will save $3,000 per year over the next three years. Now what is your answer?

Question 13 options:

< 2 years, yes

>3 years, yes

< 2 years, no

3 years, no

< 2 years, yes

>3 years, yes

< 2 years, no

3 years, no

Explanation / Answer

Answer < 2 years , Yes

Explanation:

Year Cash flows Discount Factor @10% Discounted cash flows Cumulative Discounted cash flows Year 1 3000 0.90909 2727.27 2727.27 Year 2 3000 0.82645 2479.35 5206.62 Discounted payback period = 1 year + (5000-2727)/2479 Discounted payback period = 1 year + 0.92 Discounted payback period = 1.92 Years

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