CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A project costs $100,000 today and is expected to produce cash inflows of $60,000 at the end of Year 1 and $60,000 at the end of Year 2. The cost of capital is 10%. The discounted payback period is closest to:
Discounted payback is about 1.9 years. The present value of the Year 1 inflow is 54,545, leaving 45,455 to recover. Year 2 inflow has a present value of 49,587, so 0.92 of that year is needed, giving roughly 1.92 years.
- A1.7 years
- B1.9 yearsCorrect
- C2.0 years
Explanation
PV of Year 1 inflow = 60,000/1.10 = 54,545. Remaining = 45,455. PV of Year 2 inflow = 60,000/1.21 = 49,587. Fraction = 45,455/49,587 = 0.917. Discounted payback = 1.92, closest to 1.9 years. Simple payback would be 1.67 years (1.7), which ignores discounting.
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