Jamieson is considering a 5-year, $250,000 project with annual cash flows of $90,000.If the company's required return is 10%, determine its discounted payback.
A)3.27years
B)3.43 years
C)3.79 years
D)4.01 years

Question

Quizplus · Accepted Answer

To calculate discounted payback, we need to find out how many years it takes for the sum of the discounted cash flows to equal the initial investment.

Discounted cash flows:
Year 1: $90,000/(1.1)^1 = $81,818.18
Year 2: $90,000/(1.1)^2 = $74,380.17
Year 3: $90,000/(1.1)^3 = $67,618.34
Year 4: $90,000/(1.1)^4 = $61,471.22
Year 5: $90,000/(1.1)^5 = $55,890.20

Cumulative discounted cash flows:
Year 1: $81,818.18
Year 2: $156,198.34
Year 3: $223,816.68
Year 4: $285,287.90
Year 5: $341,178.10

The discounted payback is between year 4 and year 5, since the cumulative discounted cash flows at the end of year 4 is $285,287.90 and it only takes $250,000/$55,890.20 = 4.465 years to reach that amount. So the discounted payback is:

Year 4 + ($250,000 - $285,287.90)/$55,890.20 = Year 4 + 0.43 years = 3.43 years

Therefore, the best choice is B.

Jamieson Is Considering a 5-Year, $250,000 Project with Annual Cash