Garvin Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?
A) 2.12 years
B) 2.35 years
C) 2.59 years
D) 2.85 years

Question

Garvin Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? 
A) 2.12 years 
B) 2.35 years 
C) 2.59 years 
D) 2.85 years

Quizplus · Accepted Answer

To calculate the discounted payback, we need to find the year in which the accumulated discounted cash flows equal the initial investment. Here are the calculations:

Year 0: -$900,000 (initial investment)
Year 1: $400,000 / (1 + 0.12) = $357,143
Year 2: $300,000 / (1 + 0.12)^2 = $229,972
Year 3: $200,000 / (1 + 0.12)^3 = $130,059
Year 4: $100,000 / (1 + 0.12)^4 = $54,459

At the end of Year 3, the accumulated discounted cash flows are $357,143 + $229,972 + $130,059 = $717,174. This is still less than the initial investment of $900,000.

At the end of Year 4, the accumulated discounted cash flows are $717,174 + $54,459 = $771,633. This is greater than the initial investment of $900,000.

Therefore, the discounted payback period is between Year 3 and Year 4. We can use linear interpolation to find the exact year:

Discounted payback period = Year 3 + (900,000 - 717,174) / 54,459 = Year 3 + 3.36 months

Therefore, the discounted payback period is 2.35 years (or 2 years and 4.32 months).

The best choice is B.

Garvin Enterprises Is Considering a Project That Has the Following