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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

  

Time:	0	1	2	3	4	5	6
Cash flow	–$5,000	$1,270	$2,470	$1,670	$1,670	$1,470	$1,270

  

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?

Answer 1

rate	7.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(5,000.00)	0	(5,000.00)	(5,000.00)
1,270.00	1	1,186.92	(3,813.08)
2,470.00	2	2,157.39	(1,655.69)
1,670.00	3	1,363.22	(292.47)
1,670.00	4	1,274.04	981.56
1,470.00	5	1,048.09	2,029.65
1,270.00	6	846.25	2,875.91

discounted payback = 3 + 292.47/1274.04 = 3.23 years

it should accept