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rakhi

· started a discussion

· 1 Months ago

pls explain how to solve (Question: 187909.0 )

pls explain

Question:
Cost of the project is 6,00,000 , life of the project is 5 years annual cash flow is 2,00,000 cut off rate is 10% the discounted pay back period is ______________.
Options:
A) 2 yrs
B) 2 yrs 6 months.
C) 3 yrs
D) 3 yrs 9 months.
E)

None of these

Solution:

Ans (d)

Knowledge Expert

· commented

· 1 Months ago

Apply formula:

Discounted Cash Inflow = Actual Cash Inflow/(1 + i)^n
Where,
i is the discount rate;
n is the period to which the cash inflow relates.

Usually the above formula is split into two components which are actual cash inflow and present value factor ( i.e. 1 / ( 1 + i )^n ). Thus discounted cash flow is the product of actual cash flow and present value factor.

The rest of the procedure is similar to the calculation of simple payback period except that we have to use the discounted cash flows as calculated above instead of actual cash flows. The cumulative cash flow will be replaced by cumulative discounted cash flow.

Discounted Payback Period = A + B/C
Where,
A = Last period with a negative discounted cumulative cash flow;
B = Absolute value of discounted cumulative cash flow at the end of the period A;
C = Discounted cash flow during the period after A.
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