Question

COMPUTE THE DISCOUNTED PAYBACK STATISTIC FOR PROJECT C. IF THE APPROPRIATE COST OF CAPITAL IS 6...

COMPUTE THE DISCOUNTED PAYBACK STATISTIC FOR PROJECT C. IF THE APPROPRIATE COST OF CAPITAL IS 6 PERCENT AND THE MAXIMUN ALLOWABLE DISCOUNTED PAYBACK PERIOD IS 3 YEARS.



TIME:    0 1 2 3    4    5

CASH FLOW:    $-3,000    $1,280 $1,080    $1,120 $700 $500

ACCEPT OR REJECT THE PROJECT?

Homework Answers

Answer #1
Year Cash flows Present value@6% Cumulative Cash flows
0 (3000) (3000) (3000)
1 1280 1207.55 (1792.45)
2 1080 961.20 (831.25)
3 1120 940.37 109.12
4 700 554.47 663.59
5 500 373.63 1037.22(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+(831.25/940.37)

=2.88 years(Approx).

Hence since discounted payback is less than 3 years;project must be accepted.

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