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 2.5 and 3.0 years, respectively.

Time:	0	1	2	3	4	5
Cash flow	–$233,000	$65,600	$83,800	$140,800	$121,800	$81,000

Use the discounted payback decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Discounted Payback __________ years

Should it be accepted or rejected?

• accepted

• rejected

Answer 1

	Time	0	1	2	3	4	5
i	Cash flow	-233000	$65,600	$83,800	$140,800	$121,800	$81,000
ii	PVIF @ 11%	1.0000	0.9009	0.8116	0.7312	0.6587	0.5935
iii=i*ii	present value	(233,000.00)	59,099.10	68,013.96	102,951.75	80,233.43	48,069.56
iv	Cumulative dicounted cash flow	(233,000.00)	(173,900.90)	(105,886.94)	(2,935.19)	77,298.24	125,367.80
	therefore discounted payback period=		3+2935.19/80233.43
			3.04	Year
	We can see that discounted payback period of 3.04 is higher than required discounted payback period of 3 year.
	therefore project should not be accepted.
	Ans =	REJECTED