Question

Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7...

Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7 percent and the maximum allowable discounted payback period is three years. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Project C
Time: 0 1 2 3 4 5
Cash flow: –$2,400 $1,040 $900 $940 $580 $380

Should the project be accepted or rejected?

  • accepted

  • rejected

Homework Answers

Answer #1

1)

Present value of year 1 cash flow = 1040 / (1 + 0.07)1 = 971.962617

Present value of year 2 cash flow = 900 / (1 + 0.07)2 = 786.094855

Present value of year 3 cash flow = 940 / (1 + 0.07)3 = 767.320004

Present value of year 4 cash flow = 580 / (1 + 0.07)4 = 442.479223

Present value of year 5 cash flow = 380 / (1 + 0.07)5 = 270.934748

Cumulative cash flow for year 0 = -2400

Cumulative cash flow for year 1 = -2400 + 971.962617 = -1,428.037383

Cumulative cash flow for year 2 = -1,428.037383 + 786.094855 = -641.942528

Cumulative cash flow for year 3 = -641.942528 + 767.320004 = 125.38

641.942528 / 767.320004 = 0.84

Discounted payback = 2 + 0.84 = 2.84 years

2)

Project should be accepted as it has a discounted payback less than 0.

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