Question

Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is 3 years. Time: 0 1 2 3 4 5 Cash flow: -1,000 500 480 400 300 150

2.98 years,accept

4.98 years, reject

3.49 years, reject

2.49 years, accept

Answer 1

Year	Cash flows	Present value@10%	Cumulative Cash flows
0	(1000)	(1000)	(1000)
1	500	454.55	(545.45)
2	480	396.69	(148.76)
3	400	300.53	151.77
4	300	204.90	356.67
5	150	93.14	449.81(Approx)

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(148.76/300.53)

=2.49 years(Approx).

Hence discounted payback is less than 3 years;project must be accepted.(Option D).