An investment project has the cash ﬂow stream of £-250, £75, £125, £100, and £50.The cost of capital is 12%.What is the discounted payback period?
A)3.15 years.
B)3.38 years.
C)3.45 years.
D)3.60 years.
E)4.05 years.

Question

Quizplus · Accepted Answer

Using the formula for discounted payback period:

Cumulative Discounted Cash Flows (DCF)
= -250 + 75/(1+0.12)^1 + 125/(1+0.12)^2 + 100/(1+0.12)^3 + 50/(1+0.12)^4
= -250 + 66.96 + 100.13 + 70.84 + 30.56
= 18.49

Year of Recovery = last year with negative cumulative discounted cash flows + absolute value of cumulative discounted cash flows at end of previous year/ discounted cash flow of first year with positive cash flow

Year of Recovery = 3+18.49/66.96
= 3.38 years

Therefore, the discounted payback period is 3.38 years. The best choice is B.

An Investment Project Has the Cash ﬂOw Stream of £-250