Compute the payback period statistics for Project B and decide whether the firm

Question

Compute the payback period statistics for Project B and decide whether the firm should accept or reject the project with the cash flows shown in the chart if the maximum allowable payback is three years.

Project B

Time                      0                          1                  2               3               4             5

Cash Flow         $-11,000            $3,350       $4,180      $1,520    $950       $1,000

In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

Explanation / Answer

Initial Investment = 11,000

Year 1 = 3,350

Year 2 = 4,180

Year 3 = 1,520

Summing all the cash flows of year 1,2,3 = 9050 < 11,000

Maximum allowable payback period is 3 years

Therefore, It is not able to recollect its initial investment in 3 years

Therefore, firm should reject the project

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