Suppose your firm is considering investing in a project with the cash flows show

Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively.

Use the NPV decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively.

Explanation / Answer

NPV Year Cash flows Discount factor PV Cumu PV 0 -350000 1 -350000 1 66300 0.901 59736.3 59736.3 2 84500 0.812 68614 128350.3 3 141500 0.731 103436.5 231786.8 4 122500 0.659 80727.5 312514.3 5 81700 0.593 48448.1 360962.4 NPV = 10962.4 Discounted Payback Period = 4 + (350000 - 312514.3)/360962.4 = 4.10 years As the project is having a positive NPV, but its discounted Payback Period is above the desired. So, the project should not be accepted.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.