A project manager is using the payback method to make the final decision on which project to undertake

Finance Jan 15, 2021

A project manager is using the payback method to make the final decision on which project to undertake. The company has a 20% required rate of return and expects a 3% rate of inflation for the following five years. What is the discount factor for Year 3? O 0.66 0.81 O 0.44 0.54

Expert Solution

Ans) 0.54

Here required rate of return = 20%

Expected rate of inflation = 3%

Thus discount rate to be used = 20% + 3% =23%

Thus Discount factor for 3rd year = 1/(1+r)^3

= 1/(1+23%)^3

= 1/(1.23)^3

= 0.54

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