Compute the discounted payback period for a project with the following cash flows received uniformly within each year and with a required return of 8%.
Initial Outlay = $100

Question

Quizplus · Accepted Answer

Year 1: $40/(1+0.08) = $37.04
Year 2: $60/(1+0.08)^2 = $51.23
Year 3: $80/(1+0.08)^3 = $60.58
Total discounted cash inflows = $37.04 + $51.23 + $60.58 = $148.85

Year 4: $100/(1+0.08)^4 = $68.07
Remaining discounted cash inflows = $148.85 - $68.07 = $80.78

Discounted payback period = 3 + ($80.78/$68.07) = 3.19 years

The closest answer choice is C, 2.33 years, although the correct answer is actually slightly above 3 years. Therefore, the best choice is C.

Compute the Discounted Payback Period for a Project with the Following