Choice "D" is correct. The discounted payback period of 3.25 years is computed as follows:
| Net
cash flows
|
| Present value
factor at 8%
|
| Product
| Cumulative
|
|---|
Year 1 | $10,000 | × | 0.926 | = | 9,260 | 9,260 |
Year 2 | $15,000 | × | 0.857 | = | 12,855 | 22,115 |
Year 3 | $20,000 | × | 0.794 | = | 15,880 | 37,995 |
Year 4 | $27,000 | × | 0.735 | = | 19,845 | |
The cumulative payback after three years is $37,955. The portion of the fourth year needed to fully pay back the investment is computed as the ratio of the amount remaining to be recovered to the amount collected in the fourth year as follows:
(43,000 − 37,995) ÷ 19,845.252 |
The discounted payback period is, therefore:
Years 1-3 | 3.00 years |
Years 4 | 0.25 years |
Total | 3.25 years |
Choice "b" is incorrect. This solution only anticipates payback of the capital investment net of salvage.
Choice "a" is incorrect. This solution does not apply the discount factors.
Choice "c" is incorrect, per the above.
