part 2: Discounted payback period- the time it takes to recover the initial investment based on the present value of future cash flows

Your firm would like to launch a new product. It will only do so if it can enhance shareholder wealth by undertaking a project that will produce cash flows sufficient to offset required rates of return. The firm wants to test the project's forecasted profits and cash flows using all methods. The product will have an upfront cost of $1,000,000, will be sold for five years, and then will be replaced by newer technology so will have no salvage value. The required rate of return for a project with this level of risk is 15%. The forecasted cash flows are as follows: Year 1: $373,333 Year 2: $460,000 Year 3: $286,666 Year 4: $200,000 Year 5: $113,333 The firm's policy (hurdles) for asset investment (capital budgeting) decisions are: Payback Period s 3 years Discounted Payback period 4 years Net Present Value 2 0 Internal Rate of Return 15% Profitability Index 2 1 1. Payback Period - The time it takes to recover the initial cash outlay