Question
Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is
Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): Year 1 2 3 4 a. What is the regular payback period for each of the projects? For Project A, the initial investment is $25 million and the annual cash flows are $5 million in year 1, $10 million in year 2, $15 million in year 3, and $20 million in year 4. Therefore, the regular payback period for Project A is 3.5 years For Project B, the initial investment is also $25 million and the annual cash flows are $20 million in year 1, $10 million in year 2, $8 million in year 3, and $6 million in year 4. Therefore, the regular payback period for Project B is 1.25 years . What is the discounted payback period for each of the projects?
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