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CVS Pharmacy has a project which has the following cash flows. Year 0 = -$200,000 Year...

CVS Pharmacy has a project which has the following cash flows.

Year 0 = -$200,000

Year 1 = $50,000

Year 2 = $100,000

Year 3 = $150,000

Year 4 = $40,000

Year 5 = $25,000

The cost of capital is 10%. What would happen to the discounted payback if the cost of capital increased to 12%?

the discounted payback would increase

the discounted payback would decrease

the discounted payback would be unchanged
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Answer #1

Solution :

The discounted payback period of the project at 10 % cost of capital is = 2.64 years

The discounted payback period of the project at 12 % cost of capital is = 2.71 years

Thus if the cost of capital is increased to 12 % , the discounted payback period will increase from 2.64 years to 2.71 years.

The solution is option 1 : the discounted payback would increase.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

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