Discounted payback: Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. The firm's cost of capital is 10 percent. What is the discounted payback period for this project? If their acceptance period is three 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. At a 10% discount rate, the discounted cash flows over five years do not cover the initial investment within three years, resulting in a discounted payback period of 4.3 years. Thus, the project will not be accepted.

Discounted Payback: Kathleen Dancewear Co