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 statistic for the project are 2 and 3 years, respectively.

Time   0   1   2   3   4   5   6
Cash Flow   -1,090   90   510   710   710   310  
710

Use the payback decision rule to evaluate this project; should it be accepted or rejected?
0 years, accept
4.00 years, reject
2.69 years, reject
1.13 years, accept

Explanation / Answer

Year Cash Payback Payback flows Amount Period 1 90 90 1 2 510 510 1 3 710 490 0.69 4 710 5 310 6 710 3040 1090 2.69 Answer: 2.69 years, reject

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