## Question

###### Q4. (25 marks) Alina Smith is considering an investment which will cost her $120,000. The investment...

Q4. (25 marks) Alina Smith is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Alina requires a 10 % rate of return and has a required discounted payback period of three years. Calculate discounted payback period and comment whether the project should be accepted or not.

## Answers

PLEASE RATE THE ANSWERAnswer

Payback refers to the time taken by the project to recover its initial investment

We calculate cumulative cash flows for calculating the payback periodCash flows are discounted at 10% .

Year Cash flows Discounted cash flows Cumulative cash flows 0 -120000 -120000 -120000 1 0 0 0 2 35000 28925.62 -91074.4 3 55000 41322.31 -49752.1 4 75000 51226.01 1473.943

As we see the cumulative cash flows become positive between the end of 3rd and 4 th year .

D.P.B = 3 + (49752/51226.01)

= 3+ .97

= 3.97 years

The discounted payback period is greater than 3 years. The PROJECT SHOULD NOT BE ACCEPTED .

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