Question

Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent and the maximum allowable payback is 4 years.

Time:	0	1	2	3	4	5
Cash flow:	-2,100	350	700	800	750	525

Answer 1

Time	Cash flow	PVF @12%	Discounted cash flows
0	-2100	1	-2100
1	350	0.893	312.500
2	700	0.797	558.036
3	800	0.712	569.424
4	750	0.636	476.639
5	525	0.567	297.899
Net present value			114.498

Since the NPV is positive the project must be accepted.

Accounting payback period = 3 years + (2100 -1850) / 750 = 3.33 years

Discounted payback period = 4 + (2100 - 1916.598) / 297.899 = 4.615 years

Going by the accounting payback it satisfies the condition.