Suppose your firm is considering investing in a project with the cash flows show
ID: 2793838 • 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 statistics for your company are 3.0 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow –$242,000 $66,500 $84,700 $141,700 $122,700 $81,900 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Discounted payback years Should it be accepted or rejected? Rejected Accepted
Explanation / Answer
Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=3+(9735.85/80826.29)
=3.12 years(Approx)
Hence since maximum period allowed is 3.5 years;the project is accepted.
Year Cash flows Present value@11% Cumulative Cash flows 0 (242000) (242000) (242000) 1 66500 59909.91 (182090.09) 2 84700 68744.42 (113345.67) 3 141700 103609.82 (9735.85) 4 122700 80826.29 71090.44 5 81900 48603.66 119694.1(Approx)Related Questions
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