CFA Practice Question

CFA Practice Question

A project has the following cash flows:

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.

User Contributed Comments 2

User Comment
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!.
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