Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows:
Year 1 cash flows $133,000
Year 2 cash flows $137,000
Year 3 cash flows $125,000
Year 4 cash flows $130,000
Salvage value of new investment $25,000
Proceeds from disposal of old investment $22,000
Investment in working capital $14,000
Tax Rate 21%
With a discount rate of 9%, what is the discounted payback period of the investment.

Question

Quizplus · Accepted Answer

($250,000 + $14,000 - $22,000) = $242,000, ($133,000 x PVF, n=1, i=9% + $137,000 x PVF, n=2, i=9% + $125,000 x PVF, n=3, i=9%) = $333,851, ($242,000 - $237,328) ÷ $96,523 = .05 + 2 = 2.05 years
(cost + work cap. - Disp. proc.) = cost of invest., (PV year 1 + PV year 2 + PV year 3) = cum year 3, (cost of invest. - PV year 2) ÷ PV year 3 + 2

Sky High Company Is Considering the Purchase of an Investment