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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$5,100 $1,280 $2,480 $1,680 $1,600 $1,480 $1,280 Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) Payback years Should it be accepted or rejected? Rejected Accepted

Explanation / Answer

This would go on upto year 6.

Hence Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period)

=2+(1340/1680)

=2.80 years(Approx)

Hence since payback is less than 3.5 years;the project should be accepted.

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