Question

Compute the payback statistic for Project B if the appropriate cost of capital is 12 percent and the maximum allowable payback period is three years. (If the project never pays back, then enter a "0" (zero).) Project B Time: 0 1 2 3 4 5 Cash flow: –$12,500 $3,500 $4,480 $1,820 $0 $1,300 Should the project be accepted or rejected?

Answer 1

The correct answer is zero.

This is because the project never pays back

Year	Investment	Cash Inflow	Net Cash Flow
0	-12,500.00	-	-12,500.00	(Investment + Cash Inflow)
1	-	3,500	-9,000.00	(Net Cash Flow + Cash Inflow)
2	-	4,480	-4,520.00	(Net Cash Flow + Cash Inflow)
3	-	1,820	-2,700.00	(Net Cash Flow + Cash Inflow)
4	-	0	-2,700.00	(Net Cash Flow + Cash Inflow)
5	-	1,300	-1,400.00	(Net Cash Flow + Cash Inflow)

Since the Project have a zero payback period, the project must be rejected.

Hence the correct answer is Rejected.