US CMA Part 2 · Chapter 8 · Question 11 of 15
Upton Robotics invests $300,000 in a project producing after-tax cash inflows of $120,000 at the end of each of the next 4 years. The discount rate is 10%. What is the discounted payback period (to two decimals, assuming even flows within the year)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 3.02 years
Explanation
PV of inflows at 10%: Year 1 $109,091; Year 2 $99,174; Year 3 $90,158; Year 4 $81,962. Cumulative PV after Year 3 = $298,422, leaving $1,578 to recover from Year 4's $81,962: 0.02 year. Discounted payback = 3 + 0.02 = 3.02 years. The simple payback of 2.50 years ignores the time value of money.
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