Suppose your firm is considering investing in a project with the cash flows show

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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively.

Use the PI decision rule to evaluate this project

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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively.

Explanation / Answer

present value of cash flow = (CF1 *PVF@11%,1)+(CF2*PVF@11%,2).....(CF3*PVF@11$,5)

                            = (66500 * .90090)+(84700*.81162)+(141700*.73119)+(122700*.65873)+(81900*.59345)

                           = 59909.85+ 68744.21+ 103609.62+ 80826.17+ 48603.56

                           = 361693.41

PI =PResent value /Initial investment

      = 361693.41 / 352000

       = 1.0275

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