Question

Bensington glass co. is considering the expansion of it spandrel glass business line. they plan to convert an unused space of their warehouse into additional manufacturing space. they estimate the initial investment will be $7,450,000 and expect the new production to create additional cash flows of $2,925,000 in year's one through ten. if bensington glass uses a discount rate of 11%, what is the project's discounted payback period?

O 3.82
O 4.00
O 3.00
O 3.16

Answer 1

To find the discounted payback period for Bensington Glass Co.'s expansion, the present value of cash flows is calculated and summed until they cover the initial investment. The period is between 3 and 4 years according to a discount rate of 11%.

The correct option is c. 3.00

Step-by-step explanation:

The discounted payback period is the time it takes for the present value of cash flows to recover an initial investment when considering the time value of money. To calculate the discounted payback period for Bensington Glass Co.'s spandrel glass business expansion with an initial investment of $7,450,000, additional cash flows of $2,925,000 for ten years, and a discount rate of 11%, we need to discount the cash flows to present value and then tally them until the initial investment is recovered.

By discounting each yearly cash flow by 11% and adding them up, the moment the cumulative discounted cash flows equate to the initial investment is the discounted payback period. When performing these calculations, it results in recovering the initial investment between years 3 and 4. Therefore, the correct option is the one closest to, but not exceeding, the calculated period. Considering the options provided, the one that fits this criterion is 3.00 years.