Homework Answers
If cumulative discounted cash flows till year 3 is positive, we will be certain that discounted payback is less than or equal to 3 years.
Cumulative discounted cash flows till year 3:
Project A
=-130+100/1/1.1+50/1.1^2+5/1.1^3
=5.9880
Project B
=-130+90/1.1+40/1.1^2+40/1.1^3
=14.9286
We see both projects are independent and they both have cumulative discounted cash flows till year 3, they both have discounted payback less than 3 years. Hence, accept both the projects.
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