46.

Which investment project(s) does the company invest in?

Project A
Discount rate= 10%
Project A Present value factor Discounted cash flow Cumulative cash flow
Year Cash Flow
0 ($100,000) 1 (100,000) (100,000)
1 40,000 0.909091 36,364 (63,636)
2 40,000 0.826446 33,058 (30,578)
3 40,000 0.751315 30,053 (525)
4 30,000 0.683013 20,490 19,965 Payback period= 4
(In this year the discounted cash flow becomes positive)
Payback period of Project A = 4 years
Project B
Discount rate= 10%
Project B Present value factor Discounted cash flow Cumulative cash flow
Year Cash Flow
0 ($80,000) 1 (80,000) (80,000)
1 50,000 0.909091 45,455 (34,545)
2 20,000 0.826446 16,529 (18,016)
3 30,000 0.751315 22,539 4,523 Payback period= 3
4 0 0.683013 0 4,523 (In this year the discounted cash flow becomes positive)
Payback period of Project B = 3 years
Only the Project B meets the investment criteria of recovering all the costs within 3
years
Hence the company invests in B
C
The discounted payback period method discounts the estimated cash flows by the
project's cost of capital and then calculates the time needed to recover the investment.

Year CF Discounted CF Cumulative Discounted CF

0 −$200,000 −$200,000.00 −$200,000.00
1 60,000 53,571.43 −146,428.57
2 80,000 63,775.51 −82,653.06
3 70,000 49,824.62 −32,828.44
4 60,000 38,131.08 5,302.64
5 50,000 28,371.30 33,673.98

discounted payback period =number of years until the year before full recovery +
uncovered cost at beginning of the year/discounted CF during the year
=3+32,828.44/38,131.08=3.86