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 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively Tine: Cash flow $365,000 $65,000 $83,200 $140,200 $121,200 $80,400 Use the Pl decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected? O accepted O rejected

Explanation / Answer

First let us find out NPV.

the following is the table showing NPV.

PI =NPV / initial investment

=> - $18,200 / 365,000

=>- 0.049863

2nd question.

REJECTED.

Since PI is negative, this project should be rejected.

Year Discounting factot cash flow Discounted cashflow 0 1 - $365,000 - $365,000 1 (1 / (1.12)^1)=>0.89286 65,000 58,035.9 2 (1 /(1.12)^2=>0.79719 83,200 66,326.21 3 (1/(1.12)^3)=>0.71178 140,200 99,791.56 4 (1/(1.12)^4)=>0.63552 121,200 77,025.02 5 (1/(1.12)^5)=>0.56743 80,400 45,621.37 NPV - $18,200

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