Question

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years?

Answer 1

Answer:

Reject; The project never pays back on a discounted basis

Explanation:

Discounted pay back period calculates the amount of the time it takes to recover the amount invested in a project to be recovered from the cumulative discounted cash flow.

$47,000 / 1.152^2 = $35,415.46

$198,000 / 1.152^3 = $129,511.33

$226,000 / 1.152^4 = $128,321.23

The amount invested is $-309,000

The amount recovered in year 2 = $309,000 + $35,415.46 = $-273,584.54

The amount recovered in year 3 = $-273,584.54 + $129,511.33 = $-144,073.21

The amount recovered in year 4 = $-144,073.21 + $128,321.23 = $-15,751.98

The amount invested is never recovered

The project shouldn't be accepted

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