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 3.5 and 4.5 years, respectively.

Use the discounted payback decision rule to evaluate this project.

Discounted payback__________ years

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 3.5 and 4.5 years, respectively.

Explanation / Answer

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+(541.05/1190.15)

=3.45 years(Approx)

Hence since discounted payback is less than 4.5 years;the project should be accepted.

Year Cash flows Present value@9% Cumulative Cash flows 0 (5100) (5100) (5100) 1 1280 1174.31 (3925.69) 2 2480 2087.37 (1838.32) 3 1680 1297.27 (541.05) 4 1680 1190.15 649.10

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