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 13 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 -1,020 120 480 680 680 280 680 Use the NPV decision rule to evaluate this project; should it be accepted or rejected? $829.03, accept $-486.35, reject $733.65, accept $1,849.03, accept

Explanation / Answer

reject it as the payback periods are more than the maximum allowable limits.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Cash flows -1020 120 480 680 680 280 680 Discount Rate 13.0% PV of cash flows -1020 106.19 375.91 471.27 417.06 151.97 326.62 0 NPV 829 IRR 19.0% Profitability index = pv of fufuture cash flows/initial investment 1.813 Cumulative cash flows -1020 -900 -420 260 940 1220 1900 cumulative discounted cashflows -1020 -913.81 -537.89 -66.62 350.44 502.41 829.03 Payback period 2 years 8 months Dicounted payback period 3 years 2 months

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