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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,100 80 520 720 720 320 720 Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Answer 1

As Discounted payback period (3.22) > Maximum allowable discounted payback period, the project must be rejected.

Formulae