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.

   

   

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

  

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.

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

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

Year Cash flows Cumulative Cash flows 0 (5100) (5100) 1 1280 (3820) 2 2480 (1340) 3 1680 340

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