Suppose your firm is considering two mutually exclusive, required projects with
ID: 2713249 • Letter: S
Question
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 9 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time: 0 1 2 3 Project A Cash Flow -21,000 11,000 31,000 2,000 Project B Cash Flow -31,000 11,000 21,000 51,000 Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected? accept neither A nor B accept A, reject B reject A, accept B accept both A and B
Explanation / Answer
Discounted PBP Time Amount PVf PV Cumulative - (21,000.00) 1.00 (21,000.00) (21,000.00) 1.00 11,000.00 0.9174 10,091.74 (10,908.26) 2.00 31,000.00 0.8417 26,092.08 15,183.82 3.00 2,000.00 0.7722 1,544.37 16,728.19 PBP = 1 + 10908.26/26092.08 PBP = 1.42 Years Discounted PBP Time Amount PVf PV Cumulative - (31,000.00) 1.00 (31,000.00) (31,000.00) 1.00 11,000.00 0.9174 10,091.74 (20,908.26) 2.00 21,000.00 0.8417 17,675.28 (3,232.98) 3.00 51,000.00 0.7722 39,381.36 36,148.38 PBP = 2 + 3232.98/39381.36 PBP = 2.08 Years On the basis of Discounted PBP both should be accepted
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