Suppose your firm is considering investing in a project with the cash flows show
ID: 2800026 • 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: Cash flow 2 3 5 -$240,000 $66,300 $84,500 $141,500 $122,500 $81,700 Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) Payback Should the project be accepted or rejected? O Accepted years O Rejected Hints References eBook & Resources Hint#1 Check my woskExplanation / Answer
Year
Cash flow
PV Factor 11%
PV of Cash flow
Discounted 'Cum Cash flow
0
- 240,000
1.00000
- 240,000.00
- 240,000.00
1
66,300
0.90090
59,729.73
- 180,270.27
2
84,500
0.81162
68,582.10
- 111,688.17
3
141,500
0.73119
103,463.58
- 8,224.59
4
122,500
0.65873
80,694.54
72,469.95
5
81,700
0.59345
48,484.97
120,954.92
Pay back period=3 years+$8,224.59/$80,694.54
=3 years +0.10
=3.10 years
Should the project be accepted or rejected
Accepted
Year
Cash flow
PV Factor 11%
PV of Cash flow
Discounted 'Cum Cash flow
0
- 240,000
1.00000
- 240,000.00
- 240,000.00
1
66,300
0.90090
59,729.73
- 180,270.27
2
84,500
0.81162
68,582.10
- 111,688.17
3
141,500
0.73119
103,463.58
- 8,224.59
4
122,500
0.65873
80,694.54
72,469.95
5
81,700
0.59345
48,484.97
120,954.92
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