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NEW QUESTION: 1
Polk Products is considering an investment project with the following cash flows:
The company has a 10 percent cost of capital. What is the project's discounted payback?
A. 2.67 years
B. 1.86 years
C. 1.67 years
D. 2.11 years
E. 2.49 years
The PV of t = 1 CF is found as follows: N = 1, I = 10, PMT = 0, FV = 40,000, and, thus PV = - $36,363.64.
Similarly, find the PV of t = 2 CF which is $74,380.17. Since the sum of these PVs is greater than the t = 0 CF of $100,000, we know the discounted payback is less than two years. We can now solve for the discounted payback period as follows: DP = 1 + ($100,000 - $36,363.64)/$74,380.17 = 1.86.
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