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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time Cash flow -$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 Use the discounted payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) Discounted payback years Should it be accepted or rejected? OAccepted O Rejected

Explanation / Answer

This would continue upto year 6.

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

=3+(561.15/1176.05)

=3.48 years(Approx)

Hence since discounted payback is less than 4.5 years;the project should be accepted.

Year Cash flows Present value@8% Cumulative Cash flows 0 (5000) (5000) (5000) 1 1200 1111.11 (3888.89) 2 2400 2057.61 (1831.28) 3 1600 1270.13 (561.15) 4 1600 1176.05 614.90

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