Nouvel An S.A.is considering a project that requires an initial investment of $51,000.It is expected to produce annual cash flows of $35,000, $25,000 and $15,000.What is the discounted payback period for this project if the discount rate is 12%?
A)Approximately one year
B)Approximately 1.6 years
C)Approximately two years
D)The project will never reach discounted payback.

Question

Quizplus · Accepted Answer

The discounted payback period is the time it takes for the discounted cash flows to cover the initial investment. The discounted cash flows for each year are calculated as follows: Year 1: $35,000 / (1 + 0.12)^1 = $31,250; Year 2: $25,000 / (1 + 0.12)^2 = $19,886; Year 3: $15,000 / (1 + 0.12)^3 = $10,626. Adding these up sequentially: Year 1: $31,250 (not enough to cover the initial investment); Year 2: $31,250 + $19,886 = $51,136 (just covers the initial investment). Therefore, the discounted payback period is approximately two years.

Nouvel an S