Question

TB 09-166 If the required return is 12%, If the required return is 12%, what is the discounted payback period of the following cash flows? Year Cash Flow 2 $65,000 $25,000 $25,000 $25,000 $10,000 $10,000 Multiple Choice 5 years 4 years

Answer 1

Discounted Payback period:
Discounted Payback period is the period in which initial investment is recovered after considering the time value of money.

Discounted PBP = Year in which least +ve Closing Balance + [ Closing balance at that year / Discounted Cash flow in Next Year ]
If Actual disc PBP > Expected disc PBP - Project will be rejected
Actual disc PBP </= Expected disc PBP - Project will be accepted

Year	Opening Bal	CF	PVF @12%	Disc CF	Closing Bal
1	$ 65,000.00	$ 25,000.00	0.8929	$ 22,321.43	$ 42,678.57
2	$ 42,678.57	$ 25,000.00	0.7972	$ 19,929.85	$ 22,748.72
3	$ 22,748.72	$ 25,000.00	0.7118	$ 17,794.51	$   4,954.22
4	$   4,954.22	$ 10,000.00	0.6355	$   6,355.18	$ -1,400.96
5	$ -1,400.96	$ 10,000.00	0.5674	$   5,674.27	$ -7,075.23

Discounted PBP = Year in which least +ve Closing Balance + [ Closing balance at that year / Discounted Cash flow in Next Year ]

=3 + [ 4954.22 / 6355.18 ]

= 3 + 0.78

= 3.78 Years

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