Business, 18.08.2020 22:01 tanoah7623

What do you notice about the payback period as the discount rate rises? Explain this relationship Cash flow A B
Cost $8,000 $90,000
Cash flow year 1 $2,857 $9,000
Cash flow year 2 $2,857 $18,000
Cash flow year 3 $2,857 $27,000
Cash flow year 4 $2,857 $36,000
Cash flow year 5 $2,857 $13,500
Cash flow year 6 $2,857 $0
1. With a discount rate of 4%, the cash outflow for project A is:.
2. Discount rate of 12%, the cash outflow for project B is:.
3. Discount rate of 20%, the cash outflow for project B is:.
4. As the discount rate increased, the discount payback perioud. The reason is that the future dollars are worthin present value as the discount rate increases requiringfuture dollars to recover the present value of the outlay.

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Answer from: constipatedcow18

Payback Period as the discount rate rises

1. With a discount rate of 4%, the cash outflow for project A is:__$8,000.

2. Discount rate of 12%, the cash outflow for project B is:__$90,000.

3. Discount rate of 20%, the cash outflow for project B is:__$90,000.

4. As the discount rate increased, the discounted payback perioud__increased. The reason is that the future dollars are worth__lessin present value as the discount rate increases requiring__morefuture dollars to recover the present value of the outlay.

Explanation:

a) Data and Calculations:

Cash flow A B Discount Discount

Factor at 12% PV Factor 20% PV

Cost $8,000 $90,000

Cash flow year 1 $2,857 $9,000 0.893 $8,037 0.833 $7,497

Cash flow year 2 $2,857 $18,000 0.797 14,346 0.694 12,492

Cash flow year 3 $2,857 $27,000 0.712 19,224 0.579 15,552

Cash flow year 4 $2,857 $36,000 0.636 22,896 0.482 17,352

Cash flow year 5 $2,857 $13,500 0.567 7,655 0.402 5,427

Cash flow year 6 $2,857 $0

PV at 4% 12% $72,158 20% $58,320

Annuity for Project A

= $14,976 ($2,857 x 5.242) at year 6

= $12,719 ($2,857 x 4.452) at year 5

= $10,371 ($2,857 x 3.630|) at year 4

= $7,928 ($2857 x 2.775) at year 3

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