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JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial...

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Finance

JJ's is reviewing a project with a required discount rate of15.2 percent and an initial cost of $309,000. The cash inflows are$47,000, $198,000, and $226,000 for Years 2 to 4, respectively.Should the project be accepted based on discounted payback if therequired payback period is 2.5 years?

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4.3 Ratings (531 Votes)

Project Discount rate= 0.152
Year Cash flow stream Cumulative cash flow Discounting factor Discounted CF Cumulative cash flow Cumulative discounted CF
0 -309000 -309000 1 -309000 -309000 -309000
1 47000 -262000 1.152 40798.61 -262000 -268201
2 198000 -64000 1.327104 149197 -64000 -119004
3 226000 162000 1.528824 147826.1 162000 28821.72
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-119004.34))/(28821.72-(-119004.34))
2.81 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor

Reject as discounted payback is more than 2.5 years
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