A project manager is using the payback method to make the final decision on which project to undertake.The company has a 15% required rate of return and expects a 5% 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? $$\begin{array} { | l | l | }
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -\$ 500,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 75,000 \
\hline 3 & \$ 150,000 \
\hline 4 & \$ 150,000 \
\hline 5 & \$ 750,000 \
\hline
\end{array}$$
A)3.9 years
B)4.3 years
C)4.6 years
D)4.1 years

Question

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 15% required rate of return and expects a 5% 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? $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -\$ 500,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 75,000 \
\hline 3 & \$ 150,000 \
\hline 4 & \$ 150,000 \
\hline 5 & \$ 750,000 \
\hline
\end{array}$$
A)3.9 years
B)4.3 years
C)4.6 years
D)4.1 years

Quizplus · Accepted Answer

The discounted payback period is calculated by discounting each cash flow at the required rate of return (15%) and then determining when the cumulative discounted cash flows equal the initial investment. After discounting the cash flows, the cumulative total reaches the initial investment between years 4 and 5, specifically at 4.3 years.

A Project Manager Is Using the Payback Method to Make