Question

Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the maximum allowable payback period is four years. (Round your answer to 2 decimal places.)

Project A
Time:	0	1	2	3	4	5
Cash flow:	−$3,000	$1,150	$1,080	$920	$700	$500

Should the project be accepted or rejected?

• accepted

• rejected

Answer 1

Statement showing cummulative cash flow

Year	Cash flow	Cummulative cash flow
1	1150	1150
2	1080	2230
3	920	3150
4	700	3850
5	500	4350

Now using interpolation we can find payback period

Year	Cummulative cash flow
2	2230
3	3150
1	920
?	770

= 770/920

=0.84

Thus payback perid = 2 + 0.84 = 2.84 years

Yeas project should be selected as payback period of the project is less than  maximum allowable payback period is four years