Question

J&J Enterprises is considering an investment that will cost $318,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $47,000. This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently. The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years. Should the project be accepted? Why or why not? accept; The discounted payback period is 2.18 years. accept; The discounted payback period is 2.32 years. accept; The discounted payback period is 2.98 years. reject; The discounted payback period is 2.18 years. reject; The project never pays back on a discounted basis.

Answer 1

Answer:

It will take 3 years and 270 days to pay back the investment.

Explanation:

The payback period is the time required for the discounted cash flow to cover the initial investment. We need to use the following formula on each cash flow:

PV= Cf / (1+i)^n

Year 1= 0 - 318,000= -318,000

Year 2= (47,000 / 1.155^2) - 318,000= - 282,768.28

Year 3= (198,000 / 1.155^3) - 282,768.28= -93,697,07

Year 4= (226,000 / 1.155^4) - 93,697.07= 33,296.14

To be more accurate:

(93,697.07 / 126,993.21)= 0.74*365= 270

It will take 3 years and 270 days to pay back the investment.