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	–$241,000	$66,400	$84,600	$141,600	$122,600	$81,800

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

Payback

years

Should the project be accepted or rejected?

Accepted Rejected

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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	–$231,000	$65,400	$83,600	$140,600	$121,600	$80,800

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

Discounted payback

years

Should it be accepted or rejected?

Rejected Accepted

Answer 1

Payback period is the time period in which the initial investment is recovered

Time	Cash Flow	Cumulative Cash Flow
0	-241,000	-241,000
1	66,400	-174,600
2	84,600	-90,000
3	141,600	51,600
4	122,600	174,200
5	81,800	256,000

Payback period = 2 + 90,000/141,600

= 2.64 years

Since it is less than acceptable payback period of 3 years, the project should be

ACCEPTED

Time	Cash Flow	PVF	Discounted Cash Flow	Cumulative Discounted Cash Flow
0	-231,000	1	-231,000	-231,000
1	65,400	0.901	58,925.4	-172,074.6
2	83,600	0.812	67,883.2	-104,191.4
3	140,600	0.731	102,778.6	-1,412.8
4	121,600	0.659	80,134.4	78,721.6
5	80,800	0.593	47,914.4	126,636

Discounted payback period = 3 + 1,412.8/80,134.4

= 3.02 years

Since it is more than acceptable discounted payback period of 3.5 years. The project should be

REJECTED