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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow –$241,000 $66,400 $84,600 $141,600 $122,600 $81,800 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Discounted payback years

Answer 1

Year	Cash flows	Present value@11%	Cumulative Cash flows
0	(241000)	(241000)	(241000)
1	66400	59819.82	(181180.18)
2	84600	68663.26	(112516.92)
3	141600	103536.70	(8980.22)
4	122600	80760.42	71780.2
5	81800	48544.32	120324.52

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).

=3+(8980.22/80760.42)=3.11 year(Approx)

Hence since discounted payback is less than 3.5 years;the project can be accepted.