Question

Suppose a company had an initial investment of $45,000. The cash flow tor the next five years are $15,000,$16,000,$13,000,$18,000, and $19,000, respectively. The interest rate is 5%. Enter your answer rounded to 2 DECIMAL PLACES. What is the discounted payback period? If the firm requires a discounted payback periods 3 years or less, will the project be accepted?

a.yes
b.no

Answer 1

The discounted payback period determines the recovery time for an investment based on discounted cash flows. The initial investment must be recuperated within the first 3 years using a 5% discount rate to be acceptable according to the firm's criteria.

Step-by-step explanation:

The discounted payback period is the time it takes for a project to break even in terms of discounted cash flows. In this case, we discount the future cash flows of $15,000, $16,000, $13,000, $18,000, and $19,000 at an interest rate of 5% to calculate when the initial investment of $45,000 is paid back.

To calculate the discounted cash flows, we use the formula:

Present Value = Future Cash Flow / (1 + Interest Rate) ^ Number of Years

This results in discounted cash flows for each year, which we then sequentially subtract from the initial investment to find the payback period.

The firm's requirement for a discounted payback period of 3 years or less means that we need to check if the cumulative discounted cash flows cover the initial investment within the first 3 years. Based on these calculations, we are able to determine the acceptability of this investment for the firm.