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**CFA Practice Question**

A project has the following cash flows:

Year1 4000

Year2 4000

Year3 3000

Year4 3000

Year5 2000

Year0 -10000

Year1 4000

Year2 4000

Year3 3000

Year4 3000

Year5 2000

The discount rate is 8%. What is the discounted payback period?

A. 2.67

B. 3.22

C. 3.67

**Explanation:**The discounted values of the cash flows for the first 4 years are 3703.70, 3429.36, 2381.50, and 2205.09 respectively. The first 3 years of cash flows add up to less than $10,000 (initial investment), so pro-rata the 4th year $2,205 to find the total discounted payback period.

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**User Contributed Comments**
2

User |
Comment |
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achoi0 |
so if the first 3 years of discounted cash flows do not cover the initial investment. The discounted payback period must be more than 3 years. |

carreca |
Total discounted CF of 3 years = 9,514.56 Remaining= 10,000 - 9,514.56 -> 485.44 Pro-rata 4th year= 485.44/2,205.09=0.22 Answer B = 3.22 Answer A is correct for payback period not discounted payback period!. |