Question

Header 04. (25 marks) Alina Smith is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently Alina requires a 10 % rate of retum and has a required discounted payback period of three years Calculate discounted payback period and comment whether the project should be accepted or not 100% + English (US)

Answer 1

Calculate the discounted payback period as shown below:
Year	Cash flow	Discount factor @ 10%		Present value	Cumulative present value of cash flow
0	-$120,000	1.00000	1/(1.1^0)	-$120,000.00	-$120,000.00
1	$0	0.90909	1/(1.1^1)	$0.00	-$120,000.00
2	$35,000	0.82645	1/(1.1^2)	$28,925.62	-$91,074.38
3	$55,000	0.75131	1/(1.1^3)	$41,322.31	-$49,752.07
4	$75,000	0.68301	1/(1.1^4)	$51,226.01	$1,473.94
Discounted payback period	3 year + (49752.07/51226.01)
Discounted payback period	3.97	years
Thus, discounted payback period is 3.97 years which is higher than required payback period of 3 years and thus project should be rejected