Toolkit Decision Rules PBAK IRR NPV Calculate Discounted P

(Toolkit – Decision Rules – PBAK, IRR, NPV) Calculate Discounted Payback – After a change of policy, your boss now states that the payback period is still less than 3 years but that cash flows must be discounted at 10%. Still assume $5K expenditure on a new piece of equipment that will save $3,000 per year over the next three years. Now what is your answer?

Question 13 options:

< 2 years, yes

>3 years, yes

< 2 years, no

3 years, no

	< 2 years, yes
	>3 years, yes
	< 2 years, no
	3 years, no

Answer < 2 years , Yes

Explanation:

Year	Cash flows	Discount Factor @10%	Discounted cash flows	Cumulative Discounted cash flows
Year 1	3000	0.90909	2727.27	2727.27
Year 2	3000	0.82645	2479.35	5206.62


Discounted payback period = 1 year + (5000-2727)/2479
Discounted payback period = 1 year + 0.92
Discounted payback period = 1.92 Years

(Toolkit – Decision Rules – PBAK, IRR, NPV) Calculate Discounted Payback – After a change of policy, your boss now states that the payback period is still less

Toolkit Decision Rules PBAK IRR NPV Calculate Discounted P

Solution

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