Take Test: Chapter 13 Homework Instructions Answer tihe following questions Muip

Question

Take Test: Chapter 13 Homework Instructions Answer tihe following questions Muiple Attempts Not allowed This test can only be taken once Force Completion This test can be saved and resumed ater Mongtoanother qwsbon wil save this response Question 2 your firm is considering investing in a project with the accompanying cash Bons, thar theequaate of reture on projects of huis rak clas is 11 payback statistics for yoar company are 4 and 4 5 years, respectively Year 2 Year 3 Yea: 4 Tinne Year 0 Year 1 Flow What is the Payback Period? Would you accept or seject this project? Why? (129 TTTAra SAMSUNG

Explanation / Answer

Paybak Period can be calculated by the following CF table.

Payback Period = Year(i) + (abs(CumulativeCF(i)))/CF(i+1))

where Year(i) = last year when cummulative cash flow is neagtive

Here Year = 3 so we take abs value of cummulative CF at 3 years and divide it by the CF of 4th year to add this number to 3 and get PB = 3.67 years

Similarly Discounted CF can be calculated by taking a new series of Discounted CFs at rate of 11% and using the same principle.

Since both the payback periods are within the limits, we will accept the project

Year CF Cummulative CF 0 -125000 1 -75650 -200650 2 75000 -125650 3 49000 -76650 4 115000 38350 5 81850 120200 Payback Period 3.67

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