The company's required rate of return or weighted average cost of capital is 8%. After computing...

The company's required rate of return or weighted average cost of capital is 8%. After computing Payback period, NPV, PI, and IRR, state whether you would accept or reject each project. Management's arbitrarily set payback period is 2.75 years. Project Bart details; Inital Outlay = $118,736; cash inflows= Year 1 $60,000 Year 2 $50,000 Year 3 $28000. Would project Bart be accepted or rejected?

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Expert Solution

Pay back period= 2.17 years. This is less than the maximum allowable of 2.75 years set by the Management. Hence the project is acceptable.

NPV of the project= $ 1,913.80 Since NPV is positive, the project is acceptable.

Profitability index (PI) = 1.0161 Since PI is higher than 1, the project is acceptable.

IRR of the project= 9.008%. Since IRR is higher than the cost of capital of 8%, the project is acceptable.

As all the metrics are in favour, the project will be accepted.

Details of calculations as below:

jeff jeffy answered 1 year ago

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