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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Time:	0	1	2	3	4	5	6
Cash flow:	−$5,100	$1,240	$2,440	$1,640	$1,560	$1,440	$1,240

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

Should it be accepted or rejected?

• rejected

• accepted

Answer 1

Solution:-

To Calculate Payback Period-

Payback Period =

Payback Period
Year	Cash Flow	Cummulative Cash Flow
0	-5100
1	1240	1240
2	2440	3680
3	1640	5320
4	1560	6880
5	1440	8320
6	1240	9560

Payback Period =

Payback Period = 2.87 years

Payback period is the amount of time which projects can take to recover its Initial Investment. Payback Period is lower the Better. Company Maximum Payback Period is allowable to 3.50 years but project payback period is 2.87 years which is lower. Hence, Project is accepted.

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