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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively Time: Cash flow 0 -$240,000 $66,300 $84,500 $141,500 $122,500 $81,700 4 Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) Should the project be accepted or rejected? O Accepted 0 Rejected HintsReferences eBook&Resources; Check my work

Explanation / Answer

1) Calculation of Normal payback period and Discounted payback period :

Normal payback period = 2 years + (($240,000 - $66,300 - $84,500) / $141,500)

= 2 years + $89,200 / $141,500

= 2.63 years

Discounted cash flows :

Year 1 = $66,300 * PVF@11%,1st year = $66,300 * 0.9009 = $59,730

Year 2 = $84,500 * PVF@11%,2nd year = $84,500 * 0.8116 = $68,582

Year 3 = $141,700 * PVF@11%,3rd year = $141,700 * 0.7312 = $103,610

Year 4 = $122,500 * PVF@11%,4th year = $122,500 * 0.6587 = $80,695

Year 5 = $81,700 * PVF@11%, 5th year = $81,700 * 0.5935 = $48,485

Discouted payback period = 3 years + (($240,000 - $59,730 - $68,582 - $103,610) / $80,695)

= 3.10 years

Conclusion : project should be accepted. Since the same was under rules of company.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.