Question

Suppose your firm is considering investing in a project with the cash flows shown below, that...

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 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$5,300 $1,300 $2,500 $1,700 $1,620 $1,500 $1,300

Homework Answers

Answer #1
Year Cash Flow Cumulative CFs Discounted CFs @7% Cumulative Discounted CFs
0 -5,300 -5,300 -5,300 -5,300
1 1,300 -4,000 1,214.95 -3,785.05
2 2,500 -1,500 2,183.60 -1,601.45
3 1,700 200 1,387.71 - 213.74
4 1,620 1,820 1,235.89 1,022.15
5 1,500 3,320 1,069.48 2,091.63

6 1,300 4,620 866.24 2,957.87

Payback Period = Years before full recovery +

[Unrecovered cost at start of the year / CF during the year]

= 2 + [1,500/1,700] = 2 + 0.88 = 2.88 years

Discounted Payback Period = Years before full recovery + [Unrecovered discounted cost at start of the year / Discounted CF during the year]

= 3 + [213.74/1,235.89] = 3 + 0.17 = 3.17 years

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