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.

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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