Corporate Finance Q55

55A project requires an initial outlay of $75,000. It is expected to result in positive cash flows of $20,000 for the first two years. Projections for the third and fourth year are $36,000 and $38,000 respectively. Given that the discount rate is 9%, the discounted payback for the project is closest to:

Option : C
Explanation :
Initial outlay Year 1 Year 2 Year 3 Year 4
Cash flow -75,000 20,000 20,000 36,000 38,000
Discounted cash
flow -75,000 18,349 16,834 27,799 26,920
Cumulative DCF -75,000 -56,651 -39,817 -12,018 14,902
Discounted cash flow = (Cash flow) / (1+discount rate)^n Discounted payback period =[3 + (12018 / 26920) ] = 3.4

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