An investment project has the cash flow stream of $-250,$75,$125,$100,and $50. The cost of capital is 12%. What is the discounted payback period?
A) 3.15 years
B) 3.38 years
C) 3.45 years
D) 3.60 years
E) 4.05 years

Question

Quizplus · Accepted Answer

To calculate discounted payback period, we need to discount each cash flow to its present value and then add them up until we get to zero or a positive value.

Discounted cash flow stream: 
Year 0: -$250/1.12^0 = -$250.00
Year 1: $75/1.12^1 = $66.96
Year 2: $125/1.12^2 = $105.02
Year 3: $100/1.12^3 = $72.03
Year 4: $50/1.12^4 = $28.83

Cumulative discounted cash flow: 
Year 0: -$250.00
Year 1: -$250.00 + $66.96 = -$183.04
Year 2: -$183.04 + $105.02 = -$78.02
Year 3: -$78.02 + $72.03 = -$5.98 (positive cash flow)
Discounted payback period: 3 years + ($5.98/$72.03) = 3.38 years

Therefore, the best choice is B, because it has the lowest discounted payback period.

An Investment Project Has the Cash Flow Stream of $-250,$75,$125,$100,and