Scott is considering a project that will produce cash inflows of $2,100 a year f

Question

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000. What is the discounted payback period?

Please show work, thanks :)

Options:

a) 3.72 years

b) 3.91 years

c) 4.26 years

d) 4.38 years

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000. What is the discounted payback period? Options: 3.72 years 3.91 years 4.26 years 4.38 years

Explanation / Answer

Hi,

Please find the answer as follows:

Discounted Value of Cash Inflows:

Year 1 = 2100/(1+.12)^1 = 1875

Year 2 = 2100/(1+.12)^2 = 1674.11

Year 3 = 2100/(1+.12)^3 = 1494.74

Year 4 = 2100/(1+.12)^4 = 1334.59

The initial investment of 6000 will get recovered as follows:

1875 (Year 1) + 1674.11 (Year 2) + 1494.74 (Year 3) and Balance of 956.15 between Year 3 and Year 4

Payback Period = 3 + 956.15/1334.59 = 3.72 Years

Option A (3.72 Years) is the correct answer.

Thanks.

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