ACCA FM · Chapter 6 · Question 5 of 10
A project costs $100,000 and generates net cash inflows of $40,000 a year for four years, arising evenly through each year. The cost of capital is 12%, with discount factors of 0.893, 0.797, 0.712 and 0.636 for years 1 to 4. What is the discounted payback period (to 2 decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 3.15 years
Explanation
PV of inflows: year 1 35,720; year 2 31,880; year 3 28,480; year 4 25,440. Cumulative PV after 3 years = 96,080, leaving 3,920 to recover. Discounted payback = 3 + 3,920 / 25,440 = 3.15 years. The simple (undiscounted) payback would be 100,000 / 40,000 = 2.50 years.
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