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4 years ago

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Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required r

ate of return is 8 percent.
Year
0 1 2 3 4 5
Glass Flows $51100 $13150 $16050 $23900 $12400 $3050
The discounted payback period is:________.
a. 0.39 year longer than the payback period.
b. 0.64 year longer than the payback period.
c. 0.76 years longer than the payback period.
d. 0.25 years longer than the payback period.

1 answer:

oksano4ka [1.4K]4 years ago

3 0

Answer:

c. 0.76 years longer than the payback period.

Explanation:

Payback period calculates how long it takes to recover the amount invested in a project from its cumulative cash flows.

the amounted invested in the project = $-51100

In year 1, the amount recovered = $-51,100 + $13150 = $-37,950

In year 2, the amount recovered = $-37,950 + $16050 = $-21,900

In year 3, the amount recovered = $-21,900 + $23900 = $2000

the amount invested is recovered in 2 + 21,900 / 23900 = 2.92 years

Discounted payback period calculates how long it takes to recover the amount invested in a project from its cumulative cash flows.

discounted cash flows

$13150 / 1.08 = $12,175.93

$16050 / 1.08^2 = $13,760.29

$23900 / 1.08^3 = $18972.59

$12400 / 1.08^4 = $9114.37

the amount is recovered in 3 + 6191.19 / 9114.37 = 3.68 years

the discounted payback is longer than the payback period by 3.68 years - 2.92 years = 0.76 years

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Answer:

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At 7.1% compounding rate, in 37 years, RuthAnn would have set aside an amount estimated by the future value of an annuity formula.

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