Suppose your firm is considering investing in a project with the cash flows show
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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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Use the discounted payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)
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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Explanation / Answer
Time PVF@8% Amount PV 1.00 0.93 1,290.00 1,194.44 2.00 0.86 2,490.00 2,134.77 3.00 0.79 1,690.00 1,341.58 4.00 0.74 1,690.00 1,242.20 5.00 0.68 1,490.00 1,014.07 6.00 0.63 1,290.00 812.92 Payback period is the time period in which initial investment is expected to be recovered Time Cash InFlows Cumulative cash Inflows 1.00 1,194.44 1,194.44 2.00 2,134.77 3,329.22 3.00 1,341.58 4,670.79 4.00 1,242.20 5,913.00 5.00 1,014.07 6,927.06 6.00 812.92 7,739.98 Payback period is the time period in which the cash outflows will be recovered Cash Outflows 5,200.00 Cash Inflows in first 3 years 4,670.79 Cash inflows required in 4 th year(5200 - 4670.79) 529.21 Cash inflows in 4th Year 1,242.20 Payback period = 3 + 529.21/1242.20 Payback period = 3 + .4260 Payback period = 3.426 Years Yes project should be accepted since discounted PBP is 3.426 yrs which is less than firms criteria of 4.5 Years
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