Suppose your firm is considering investing in a project with the cash flows show
ID: 2793791 • 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 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
Use the PI decision rule to evaluate this project. (Do not round intermediate calculations. Round your final 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 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=65100/1.12+83300/1.12^2+140300/1.12^3+121300/1.12^4+80500/1.12^5
=$347160.2236
pi=Present value of inflows/Present value of outflow
=$347160.2236/$364000
=0.95(Approx)
Since PI is less than one;the project should be rejected.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.