Suppose your firm is considering investing in a project with the cash flows show
ID: 2753581 • Letter: S
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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.
Use the discounted payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)
What is the discounted Payback (In Years)
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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.
Explanation / Answer
Calculation of discounted payback period
The maximum allowable discounted payback statistics is 3 years
But in 3 years the project gives payback of ($1009.17+$1935.86+$1158.28) $4103.31 out of cash outflow of $4400
IN 4th year discounted cash inflow = $1062.64 remaining payback = (4400-4103.31) $296.69
Therefore to time in 4th year to get cash inflow of $296.69 = $296.69/$1062.64 = 0.2792
THerefore discounted payback period of the project = 3+0.2792 = 3.2792 i,e 3.28 years
Since discounted payback is more than maximum allowable payback of 3 years therefore project should not be accepted
Year 1 $1100 0.917431192 $1009.17 Year 2 $2300 0.841679992 $1935.86 Year 3 $1500 0.772183478 $1158.28 Year 4 $1500 0.708425209 $1062.64 Year 5 $1300 0.649931384 $844.91 Year 6 $1100 0.596267324 $655.89Related Questions
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