A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the discounted payback of a project that has cash flows as shown in the table?
A)3.4 years
B)2.6 years
C)5.0 years
D)4.2 years

Question

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the discounted payback of a project that has cash flows as shown in the table? 
A)3.4 years 
B)2.6 years 
C)5.0 years 
D)4.2 years

Quizplus · Accepted Answer

To calculate the discounted payback period, we need to calculate the present value of each cash flow and add them up until we reach the initial investment.

Year 1: $100/(1.1*1.04)^1 = $85.47
Year 2: $150/(1.1*1.04)^2 = $117.51
Year 3: $200/(1.1*1.04)^3 = $148.32
Year 4: $250/(1.1*1.04)^4 = $178.21
Year 5: $300/(1.1*1.04)^5 = $207.50

Total present value at the end of year 4 = $627.51
Amount remaining to be recouped at the end of year 4 = $200 - $178.21 = $21.79
Discounted payback period = 4 + $21.79/$207.50 = 4.1 years

Therefore, the discounted payback period for this project is 5 years, which exceeds the company's maximum payback period of 4 years. Hence, this project should not be undertaken. The answer is C.

A Project Manager Is Using the Payback Method to Make