Discounted payback: Garland Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The company's cost of capital is 12 percent. What is the discounted payback period for this project? If the company's acceptance period is five years, will this project be accepted?

Question

Quizplus · Accepted Answer

The discounted payback period is the time it takes for the present value of cash flows to cover the initial investment. Calculating the discounted cash flows for each year and summing them until they equal the initial investment of $5 million results in a period of 6.1 years. Since this exceeds the company's acceptance period of five years, the project will not be accepted.

Discounted Payback: Garland Electronics Bought New Machinery for $5 Million