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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.5 and 3.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$4,800 $1,180 $2,380 $1,580 $1,580 $1,380 $1,180 Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) Payback years Should it be accepted or rejected? Accepted Rejected

Explanation / Answer

Use the payback decision rule to evaluate this project

Payback Period = 2 + 1240/1580

Payback Period = 2.78 Years

Should it be accepted or rejected?

Rejected , Since Payback period is higher than the maximum allowable payback

Year Cash Flow Cummulative 0 -4800 -4800 1 1180 -3620 2 2380 -1240 3 1580 340 4 1580 1920 5 1380 3300 6 1180 4480

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