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 statistic for the project are 2 and 3 years, respectively.

Time	0	1	2	3	4	5	6
Cash Flow	-990	190	410	610	610	210	610

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

Multiple Choice

• 2.64 years, reject

• 0 years, accept

• 4.00 years, reject

• 1.31 years, accept

Answer 1

Solution :

The payback period f the project is = 2.64 years

The discounted payback period of the project is = 3.10 years

Since the maximum allowable payback period is 2 years and the actual payback period is = 2.64 years, the project should be rejected.

Also, since the discounted payback statistic is 3 years and the actual payback period is 3.10 years, the project should be rejected on this count as well.

Thus the solution is Option 2.64 Years, Reject. The project should be rejected.

Please find the attached screenshot of the excel sheet containing the detailed calculation of the above solution.