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
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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