Polk Products is considering an investment project with the following cash flows: Year Cash Flow
0 $100,000
1 40,000
2 90,000
3 30,000
4 60,000
The company has a 10 percent cost of capital. What is the project's discounted payback? Show your calculations?
a. 1.67 years
b. 1.86 years
c. 2.11 years
d. 2.49 years
e. 2.67 years

b. 1.86 years

Explanation:

The computation of the project's discounted payback is shown below:-

Year   Cash Flows      Discounted CFs (at 10%)        Cumulative

                                                                                Discounted CFs

0        -$100,000           -$100,000                          -$100,000

1          $40,000              $36,363.64                       -$63,636.36

2          $90,000              $74,380.17                        $10,743.80

3          $30,000               $22,539.44                      $33,283.25

4          $60,000               $40,980.81                      $74,264.05

Discounted Payback Period = Years before full recovery +

(Uncovered Cost at start of the year ÷ Cash Flow during the year)

Now we will put the values into the formula

= 1 + ($63,636.36 ÷ $74,380.17)

= 1 + 0.86

= 1.86 years

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