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Hi, Can you please explain to me why the answer in this question is 3years and 10 months not a 3 years and 9 months (from my calculations is 3+0.8620)? Not sure what I’m doing wrong
A company is considering whether to invest in a project involving an initial capital outlay of £220,000. The cost of capital is 9%, and the project cash flows would be as follows.
Year Cash flow Discount factor
at 9%
£
0 (220,000) 1.000
1 50,000 0.917
2 90,000 0.842
3 80,000 0.772
4 60,000 0.708
5 40,000 0.650What, to the nearest month and assuming constant monthly cash flows each year, is the discounted payback period?
3 years 10 months
3 years 0 months
3 years 9 months
3 years 2 months0 out of 2
The correct answer is: 3 years 10 months.
There are 12 months in a year.
0.8620 x 12 = 10.3 months, which is 10 to the nearest month, not 9 !
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