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. Time Cash flow -$229,000 $65,200 $83,400 $140,400 $121,400 $80,600 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Discounted payback years Should it be accepted or rejected? O Accepted Rejected

Explanation / Answer

Year Project Cash Flows (i) DF@ 12% (ii) PV of Project A ( (i) * (ii) ) Cumulative Cash Flow 0 -229000 1         (229,000.00)     (229,000.00) 1 65200 0.893            58,214.29     (170,785.71) 2 83400 0.797            66,485.97     (104,299.74) 3 140400 0.712            99,933.95          (4,365.80) 4 121400 0.636            77,151.89         72,786.10 5 80600 0.567            45,734.60       118,520.70 NPV          118,520.70 Payback Period = 3 years + 4365.80 / 77151.89 3.06 years Ans = 3.06 years Ans REJECTED since Discounted Payback is slightly more than the maximum allowable Discounted Payback period

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