Final answer:
The discounted payback period is calculated by discounting the cash flows at an 11% rate and summing them until the initial investment is recovered. If this period is under 3 years, the project is considered acceptable. The NPV is found by deducting the initial investment from the sum of discounted cash flows and indicates the profitability of the project.
Step-by-step explanation:
To determine the discounted payback period, we calculate the present value of each cash inflow using the formula = Cash Flow / (1 + r)^n, where 'r' is the discount rate (11% in this case) and 'n' is the year of the cash flow. Summing the present values until the initial investment is recovered will give us a discounted payback period.
For this company, the discounted cash flows for each year would be:
- Year 1: $13,000 / (1 + 0.11)^1
- Year 2: $16,000 / (1 + 0.11)^2
- Year 3: $18,000 / (1 + 0.11)^3
- Year 4: $17,000 / (1 + 0.11)^4
- Year 5: $20,000 / (1 + 0.11)^5
To calculate the Net Present Value (NPV), subtract the initial investment from the sum of the discounted cash flows. If the NPV is positive, it means that the project returns more than the required rate of return on the investment, making it a desirable investment.
If the discounted payback period is less than 3 years, the project is accepted (option a: Yes). Otherwise, it's rejected (option b: No).