Answer:
Project A should be rejected and Project B should be accepted.
Explanation:
Discounted payback period calculates the amount of time it takes to recover the amount invested in a project from its discounted cash flows
Project A
Cash flow in year 0 = $-18,000
Cash flow in year 1 = $3,000
Cash flow in year 2 = $7,000
Cash flow in year 3 = $10,000
I = 12%
The present value of the cash flows are less than $18,000. This means that the cash flows would not be recovered within the 3 years so project A should not be accepted
Project B
Cash flow in year 0 = $-18,000
Cash flow in year 1 = $3,000
Cash flow in year 2 = $7,000
Cash flow in year 3 = $15,000
I = 12%
Discounted cash flow in year 1 = 3000 / 1.12 = 2678.57
Discounted cash flow in year 2 = 7000 / 1.12^2 = 5580.36
Discounted cash flow in year 3 = 15000 / 1.12^3 = 10676.70
The amount recovered in year 1 = $18,000 - 2678.57 = $15,321.43
The amount recovered in year 2 = $15,321.43 - 5580.36 = $9,741.07
The amount recovered in year 3 = $9,741.07 / 10676.70 = 0.912
The amount is recovered in 2.91 years which is less than 3 years and so it is accepted
