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Suppose your firm is considering investing in a project with the cash flows shown below, that...

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Finance

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 11 percent, and that the maximumallowable payback and discounted payback statistics for yourcompany are 2.5 and 3.0 years, respectively.

Time:012345
Cash flow–$233,000$65,600$83,800$140,800$121,800$81,000

Use the discounted payback decision rule to evaluate thisproject. (Do not round intermediate calculations and roundyour final answer to 2 decimal places.)

Discounted Payback __________ years

Should it be accepted or rejected?

  • accepted

  • rejected

Answer & Explanation Solved by verified expert
3.8 Ratings (674 Votes)

Time 0 1 2 3 4 5
i Cash flow -233000 $65,600 $83,800 $140,800 $121,800 $81,000
ii PVIF @ 11%            1.0000            0.9009            0.8116            0.7312            0.6587            0.5935
iii=i*ii present value (233,000.00)       59,099.10       68,013.96     102,951.75       80,233.43       48,069.56
iv Cumulative dicounted cash flow (233,000.00) (173,900.90) (105,886.94)       (2,935.19)       77,298.24     125,367.80
therefore discounted payback period= 3+2935.19/80233.43
               3.04 Year
We can see that discounted payback period of 3.04 is higher than required discounted payback period of 3 year.
therefore project should not be accepted.
Ans = REJECTED

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Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 11 percent, and that the maximumallowable payback and discounted payback statistics for yourcompany are 2.5 and 3.0 years, respectively.Time:012345Cash flow–$233,000$65,600$83,800$140,800$121,800$81,000Use the discounted payback decision rule to evaluate thisproject. (Do not round intermediate calculations and roundyour final answer to 2 decimal places.)Discounted Payback __________ yearsShould it be accepted or rejected?acceptedrejected

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