Question

Using the information provided below and assuming the cash flows occur at a constant rate each year, calculate the discounted payback period for Project B
Undiscounted Free cash flow Discounted Free cash flow at 17% cumulative discounted free cash flow

Initial Outlay ($11,000) ($11,000) ($11,000)

Cash flow Year 1 7,000 $5,982.91 ($5,017.09)

2 4,000 $2,922.05 ( $2,095.04)

3 3,000 $1,873.11 ($221.93)

4 2,000 $1,067.30 $845.37

A. 2.79

B. 3.21

C. 4.21.

D. 3.9

Answer 1

Answer:

B. 3.21

Explanation:

The Cumulative net present value (npv) as indicated in the question has been converted from negative to positive in Year 4, therefore we can assess that the Projected B has completed its pay back period during  Year 4.

Based on above discussion, the discounted pay back period shall be calculated using the following way:

Discounted pay back period=3+Cumulative npv at Year 3/present value of Year 4 cash flow

Discounted pay back period=3+(221.93/1067.30)

                                               =3.21 years

So the answer is B. 3.21