Gem E Fallon LLP GEF is currently evaluating an investment i

Gem E. Fallon LLP (GEF) is currently evaluating an investment in a new comedy club. The club is expected to last for 4 years and generate a CF1 = $11,000, CF2 = $9,680, CF3 = $10,648, and CF4 = $58,564. The initial outlay is $20,000. Using a required return of 10%, calculate the discounted payback period for GEF\'s comedy club. (All answers below are expressed in years.)

(a) 2.19

(b) 2.25

(c) 2.00

(d) 1.93

(e) 3.00

Solution

45999.78     [5999.98+39999.98]

**Discount factoris calculating using the formula 1/(1+i)^n or can be find from the present value table at 10% for 1,2,3,4

Discounted payback period = Year up to which cummulative discounted cash flow is negative +[ discounted cummulative cash flow of that period /discounted cash flow of next year]

         = 2+ [1999.97/7999.95]

        = 2 + .25

          = 2.25 years

correct option is \" b\"