Polk Products is considering an investment project with the following cash flows: tCash Flow
0-100,000
140,000
290,000
330,000
460,000
The company has a 10 percent cost of capital. What is the project's discounted payback?
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A. B. C. D. E.B
The PV of t = 1 CF is found as follows: N = 1, I = 10, PMT = 0, FV = 40,000, and, thus PV = - $36,363.64. Similarly, find the PV of t = 2 CF which is $74,380.17.
Since the sum of these PVs is greater than the t = 0 CF of $100,000, we know the discounted payback is less than two years. We can now solve for the discounted payback period as follows: DP = 1 + ($100,000 - $36,363.64)/$74,380.17 = 1.86.