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Compute the payback statistic for Project A if the appropriate cost of capital is 8 percent...

Compute the payback statistic for Project A if the appropriate cost of capital is 8 percent and the maximum allowable payback period is four years. (Round your answer to 2 decimal places.)

Project A
Time: 0 1 2 3 4 5
Cash flow: –$1,600 $590 $660 $640 $420 $220

Should the project be accepted or rejected?

Solutions

Expert Solution

Payback period is the time within which cost of project is recovered back.
It does not consider time value of money.
Year Cash flow Cumulative cash flow
0 $       -1,600 $    -1,600
1 590        -1,010
2 660            -350
3 640              290
4 420              710
5 220              930
Payback period = 2+(350/640)
=           2.55 Years
Payback period is within maximum allowable payback period.
So, this project is acceptable.

jeff jeffy answered 4 months ago
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