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 10 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

750

Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

A 2.87 years, accept

B 2.79 years, accept

C 3.13 years, reject

D 3.15 years, reject

  Time 0 1 2 3 4 5 6   Cash Flow -1,130 50 550 750 750 350

750

Explanation / Answer

calculation of discounted payback period

discounted payback period = 3 years+66.51389932/51226000

=3.13 years so rejected

cash out flow discount factor@10% product cumilative discounted cash flow -1130 1 -1130 -1130 50 0.909090909 45.45454545 -1084.545455 550 0.826446281 454.5454545 -630 750 0.751314801 563.4861007 -66.51389932 750 0.683013455 512.2600915 445.7461922 350 0.620921323 217.3224631 663.0686553 750 0.56447393 423.3554475 1086.424103

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