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: 0 1 2 3 4 5 Cash flow: –$240,000, $66,300, $84,500, $141,500, $122,500, $81,700

Answer 1

	i	ii	iii		iv		v=iv*ii	vi
	year	Cash flow	Cumulative cash flow		PVIF @ 11%		present value	Cumulative present value
	0	(240,000)	(240,000)		1.0000		(240,000)	(240,000)
	1	66,300	(173,700)		0.9009		59,730	(180,270)
	2	84,500	(89,200)		0.8116		68,582	(111,688)
	3	141,500	52,300		0.7312		103,464	(8,225)
	4	122,500	174,800		0.6587		80,695	72,470
	5	81,700	256,500		0.5935		48,485	120,955
	NPV =						120,955
	Payback period =			2.63	year
	=2+89200/141500
	discounted payback=			3.10	year
	=3+8225/80695
	We can see that payback period and discounted payback period both are lower than the maximum allowable limit
	Therefore project should be accepted.