Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![### Project Discounted Payback Period Calculation
**Scenario:**
Dhofar Water is installing new equipment at a cost of 140,000 OMR. The expected cash flows from this project over the next three years are projected to be:
- Year 1: 95,000 OMR
- Year 2: 80,000 OMR
- Year 3: 65,000 OMR
The company's discount rate for such projects is 10 percent.
**Question:**
What is the project's discounted payback period?
**Options:**
- a. 1.81 years
- b. None of these
- c. 1.44 years
- d. 1.63 years
- e. 2.82 years
### Explanation:
To solve this, you would need to calculate the discounted cash flows for each year and determine the period in which the total of these discounted cash flows equals the initial investment.
1. **Year 1 Discounted Cash Flow:**
\[
\frac{95,000}{(1 + 0.10)^1} = 86,364 OMR
\]
2. **Year 2 Discounted Cash Flow:**
\[
\frac{80,000}{(1 + 0.10)^2} = 66,116 OMR
\]
3. **Year 3 Discounted Cash Flow:**
\[
\frac{65,000}{(1 + 0.10)^3} = 48,822 OMR
\]
Add these discounted cash flows until the cumulative discounted cash flow equals the initial investment of 140,000 OMR. The point where the initial investment is recovered is the discounted payback period. (For detailed calculation, financial formulas, and steps, please refer to advanced financial accounting materials.)
### Conclusion:
After calculating the discounted cash flows, select the appropriate option that matches the period required to recover the initial investment.
Is your answer:
- a. 1.81 years
- b. None of these
- c. 1.44 years
- d. 1.63 years
- e. 2.82 years](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F354c703c-a842-4305-963d-0cb2d6b8584b%2F20e7a69e-b0f0-4cbc-97dd-f5bc4530aaba%2Fgkq8p9b_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Project Discounted Payback Period Calculation
**Scenario:**
Dhofar Water is installing new equipment at a cost of 140,000 OMR. The expected cash flows from this project over the next three years are projected to be:
- Year 1: 95,000 OMR
- Year 2: 80,000 OMR
- Year 3: 65,000 OMR
The company's discount rate for such projects is 10 percent.
**Question:**
What is the project's discounted payback period?
**Options:**
- a. 1.81 years
- b. None of these
- c. 1.44 years
- d. 1.63 years
- e. 2.82 years
### Explanation:
To solve this, you would need to calculate the discounted cash flows for each year and determine the period in which the total of these discounted cash flows equals the initial investment.
1. **Year 1 Discounted Cash Flow:**
\[
\frac{95,000}{(1 + 0.10)^1} = 86,364 OMR
\]
2. **Year 2 Discounted Cash Flow:**
\[
\frac{80,000}{(1 + 0.10)^2} = 66,116 OMR
\]
3. **Year 3 Discounted Cash Flow:**
\[
\frac{65,000}{(1 + 0.10)^3} = 48,822 OMR
\]
Add these discounted cash flows until the cumulative discounted cash flow equals the initial investment of 140,000 OMR. The point where the initial investment is recovered is the discounted payback period. (For detailed calculation, financial formulas, and steps, please refer to advanced financial accounting materials.)
### Conclusion:
After calculating the discounted cash flows, select the appropriate option that matches the period required to recover the initial investment.
Is your answer:
- a. 1.81 years
- b. None of these
- c. 1.44 years
- d. 1.63 years
- e. 2.82 years
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