Question

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

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.