Answer:
initial investment $100,000
useful life 15 years
cash flow per year = -$2,000 + $12,000 = $10,000
discount rate 5%
discounted cash flow:
1 $10,000/1.05 = $9,524
2 $10,000/1.05² = $9,070
3 $10,000/1.05³ = $8,638
4 $10,000/1.05⁴ = $8,227
5 $10,000/1.05⁵ = $7,835
6 $10,000/1.05⁶ = $7,462
7 $10,000/1.05⁷ = $7,101
8 $10,000/1.05⁸ = $6,768
9 $10,000/1.05⁹ = $6,446
10 $10,000/1.05¹⁰ = $6,139
11 $10,000/1.05¹¹ = $5,847
12 $10,000/1.05¹² = $5,568
13 $10,000/1.05¹³ = $5,303
14 $10,000/1.05¹⁴ = $5,051
15 $10,000/1.05¹⁵ = $4,810
A) discounted pay back period = 14.2 years
B) if the decision rule is a discounted payback period of 3 years, then the project should be rejected
C) the decision rule should be the NPV, which is actually positive since the DPBP is less than 15 years. Only companies that fear premature obsolescence should base their decision on the pay back period. Since this is an electronics company, it is sound to use the pay back period as a decision parameter besides the NPV.
