Consider the following four-year project. The initial outlay or cost i

Consider the following four-year project. The initial outlay or cost is $180,000. The respective cash inflows for years 1, 2, 3 and 4 are: $100,000, $80,000, $80,000 and $20,000. What is the discounted payback period if the discount rate is 11%?

A) About 1.667 years
B) About 2.000 years
C) About 2.135 years
D) About 2.427 years

ANSWER

Answer: D
Explanation: D) We first discount all after-tax cash inflows, which gives us after-tax cash inflows of $90,090.09, $64,929.79, $58,495.31, and $13,174.62. After two years, we will have paid back $155,019.88, leaving $24,980.12 to pay back in after-tax cash flows in the third year. Since we get $58,495.31 in the third year, the rule of thumb is to divide what is needed by the cash inflows we will get next period and add it to the number of previous periods of cash inflows, e.g., ($24,980.12 divided by $58,495.31) + 2. Doing this gives 2.427 years as the discounted payback period.