J&J; Enterprises is considering an investment that will cost $318,000. The inves

Question

J&J; Enterprises is considering an investment that will cost $318,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $47,000. This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently. The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years. Should the project be accepted? Why or why not? a. accept; The discounted payback period is 2.18 years. b. reject; The project never pays back on a discounted basis. c. accept; The discounted payback period is 2.32 years. d. accept; The discounted payback period is 2.98 years. e. reject; The discounted payback period is 2.18 years.

Explanation / Answer

discounting $47000 to period 0 = 47000/(1.155^2) =$35,231.72

discounting 198000 to period 0 =198000/(1.155^3) = $128,504.766

discounting 126993 to period 0 =226000/(1.155^4) = $126,993.21

adding all these we get $290,729.70 which is less then investment cost of $318,000.

hence this project should not be accepted.

ans- b. reject; The project never pays back on a discounted basis

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