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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.5 and 3.5 years, respectively.

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

  Time: 0 1 2 3 4 5 6   Cash flow –$4,400 $1,100 $2,300 $1,500 $1,500 $1,300 $1,100

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

  Payback years?

Explanation / Answer

Specifically,

PB = 3 + ($500/$1500) =3+.33 =3.33 years

, which is greater than the maximum allowable payback, so this project should be rejected.

  Time: 0 1 2 3 4 5 6   Cash flow -$4,400 $1,100 $2,300 $1,500 $1,500 $1,300 $1,100 Cumulative Cash Flow -$4,400 -$3,300 -$1,000 $500

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