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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: Cash flow 2 4 6 -$7,300 $1,110 $2,310 $1,510 $1,510 $1,310 $1,110 Use the Pl decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) PI Should it be accepted or rejected? Accepted Rejected

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1110/1.07+2310/1.07^2+1510/1.07^3+1510/1.07^4+1310/1.07^5+1110/1.07^6

=$7113.26

PI=Present value of inflows/Present value of outflows

=$7113.26/$7300

=0.97(Approx).

Hence since PI is less than one;the project should be rejected.

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