Question

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?

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.