Question

Amanda is considering buying a cottage on the lake for $150,000 to rent during the summer months. Projected annual cash inflows for four years are $30,000, $50,000, $70,000, and $30,000 respectively. Amanda wants to recoup her money within 3.5 years after applying a 6% discount rate. What should Amanda do:

Answer 1

rate positively ..

We have to compute the discounted payback period
	i	ii	iii=i*ii	iv
year	Cash flow	PVIF @ 6%	Present value	cumulative present value
0	-150000	1.0000	$(150,000.00)	$                 (150,000.00)
1	30000	0.9434	$    28,301.89	$                 (121,698.11)
2	50000	0.8900	$    44,499.82	$                   (77,198.29)
3	70000	0.8396	$    58,773.35	$                   (18,424.94)
4	30000	0.7921	$    23,762.81	$                       5,337.87
Discounted payback period=	3+18424.94/23762.81
			3.78	year
Since, required discounted period should be not more than 3.5 year.
therefore Amanda should reject the project