Suppose for the previous Problem 3.21, that your CEO is highly risk averse and will not invest in any project with a payback longer than three years. Assuming a required rate of return of 15%, what would you tell him about this project opportunity?

Problem 3.21

Discounted Payback. Your company is considering a high-risk project that could yield strong revenues but will involve a significant up-front investment. Because of this risk, top management is naturally concerned about how long it is likely to take to pay off that investment so that they can begin to realize profits. This project will require an investment of $200,000 and your five-year projection for inflows is: Year 1 – $50,000, Year 2 – $75,000, Year 3 –

$125,000, Year 4 – $200,000, and Year 5 – $250,000. Your firm’s required rate of return is 18%. How long will it take to pay back your initial investment?