Question

Polk Products is considering an investment project with the following cash flows:

Answer 1

Answer:

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