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 2.5 and 3.5 years, respectively.

  

Time:	0	1	2	3	4	5	6
Cash flow	–$4,700	$1,170	$2,370	$1,570	$1,570	$1,370	$1,170

  

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

Payback

years

Should it be accepted or rejected?

	Accepted
	Rejected

Answer 1

For calculating payback period happen only when the net casflow become zero.

Payback period = -4700+1170+2370 = -1160

= -1160/1570 = 0.738 years

So, total payback period = 2+0.738 = 2.738 years

Now, discounted payback period = -4700+1093.45+2070.05+1281.58 = -254.90

=254.9/1197.745 = 0.212 years

So, total discounted payback period = 3+0.212 = 3.21 years

Now, maximum permisible payback and discounted payback period is 2.5 and 3.5 years. Discounted payback is under permissible limit but payback period is not under perimmisble limit. So, we have to reject the project.