Suppose your firm is considering investing in a project with the cash flows show
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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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Use the discounted payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)
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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Explanation / Answer
Project should be accepted since Discounted PBP of 3.23 years is less than maximum allowable discounted payback of 4.5 Years Discounted PBP Time Amount PVf at 7% PV Cumulative - (5,000.00) 1.0000 (5,000.00) (5,000.00) 1.00 1,270.00 0.9346 1,186.92 (3,813.08) 2.00 2,470.00 0.8734 2,157.39 (1,655.69) 3.00 1,670.00 0.8163 1,363.22 (292.47) 4.00 1,670.00 0.7629 1,274.04 981.56 5.00 1,470.00 0.7130 1,048.09 2,029.65 6.00 1,270.00 0.6663 846.25 2,875.91 Discounted PBP = 3 + 292.47/1274.04 Discounted PBP = 3 + .23 years Discounted PBP = 3.23 years
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