Suppose your firm is considering investing in a project with the cash flows show
ID: 2738026 • Letter: S
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 statistic for the project are 2 and 3 years, respectively.
660
Use the payback decision rule to evaluate this project; should it be accepted or rejected?
A 0 years, accept
B 4.00 years, reject
C 1.21 years, accept
D 2.67 years, reject
Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260660
Explanation / Answer
Calculation of pay back period Year Cash flow Commulative Value 0 -1040 -1040 1 140 -900 2 460 -440 3 660 220 4 660 880 5 260 1140 6 660 1800 Pay back period= 2+(-440/660) 2.67 Ans Dis correct reject the project Discounted pay back Year Cash flow PVAF 11% Value Commulative value 0 -1040 1.0000 -1040 -1040 1 140 0.9009 126.1261 -913.874 2 460 0.8116 373.3463 -540.528 3 660 0.7312 482.5863 -57.9412 4 660 0.6587 434.7624 376.8212 5 260 0.5935 154.2973 531.1185 6 660 0.5346 352.863 883.9815 Discounted pay back= 3+57.94/434.76 3.13
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