Question

Polk Products is considering an investment project with the following cash flows:

Year Cash Flow
0 $100,000
1 40,000
2 90,000
3 30,000
4 60,000
The company has a 10 percent cost of capital. What is the project's discounted payback? Show your calculations?
a. 1.67 years
b. 1.86 years
c. 2.11 years
d. 2.49 years
e. 2.67 years

Answer 1

b. 1.86 years

Explanation:

The computation of the project's discounted payback is shown below:-

Year Cash Flows Discounted CFs (at 10%) Cumulative

Discounted CFs

0 -$100,000 -$100,000 -$100,000

1 $40,000 $36,363.64 -$63,636.36

2 $90,000 $74,380.17 $10,743.80

3 $30,000 $22,539.44 $33,283.25

4 $60,000 $40,980.81 $74,264.05

Discounted Payback Period = Years before full recovery +

(Uncovered Cost at start of the year ÷ Cash Flow during the year)

Now we will put the values into the formula

= 1 + ($63,636.36 ÷ $74,380.17)

= 1 + 0.86

= 1.86 years