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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.

Time:	0	1	2	3	4	5	6
Cash flow	–$7,000	$1,130	$2,330	$1,530	$1,530	$1,330	$1,130

Answer 1

1)

first 4 years will recover money=1130+2330+1530+1530=6520

pay back period is=4+(7000-6520)/1330=4.36, this is above the maximum allowable 2 years, so do not accept

2)

Year	Cash Flows (1)	Discounting Factor (2)	Present value (3): (1)*(2)	Cumulative Present value
0	-7000	1.0000	-7000.00	-7000.00
1	1130	0.9174	1036.70	-5963.30
2	2330	0.8417	1961.11	-4002.19
3	1530	0.7722	1181.44	-2820.75
4	1530	0.7084	1083.89	-1736.86
5	1330	0.6499	864.41	-872.45
6	1130	0.5963	673.78	-198.67

As shown above the project has cumulative cash flows in negative even in last year (6th year), so that means it can not even recover value in the six years, so discounted payback period will be higher than 6 years which is above the maximum allowable 3 years, so do not accept

the above is answer..