Question

A project has an initial cost of $10,600 and produces cash inflows of $3,700,$4,900,and $2,500 for Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 7.5 percent?

A) 2.65 years
B) 2.78 years
C) 2.94 years
D) 2.88 years
E) Never

Answer 1

The project will never pay the initial investment.

Step-by-step explanation:

The payback period is the time required to cover the initial investment.

We need to use the following formula on each cash flow:

PV= Cf/(1+i)^n

PV1= 3,700/1.075= 3,441.86

PV2= 4,900/1.075^2= 4,240.13

PV3= 2,500/1.075^3= 2,012.40

Now, the payback period:

Year 1= 3,441.86 - 10,600= -7,158.14

Year 2= 4,240.13 - 7,158.14= -2,918

Year 3= 2,010.4 - 2,918= -907.6

The project will never pay the initial investment.