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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time Cash Flow 0123456 -1,100 80 520 720 720 320 720 Use the discounted payback decision rule to evaluate this project, should it be accepted or rejected? Multiple Choice C) 2.69 years, accept 278 years, accept C) 3.22 years, reject 3.29 years, reject

Answer 1

The Correct Answer is Option D i.e. 3.29 Years
The same has been illustrated as under
Time	Cash Flow	PV of 1 @ 12%	PV of the Cash Flows	Cummultive value
0	-1100	1	-1,100.00	-1,100.00
1	80	0.89	71.43	-1,028.57
2	520	0.80	414.54	-614.03
3	720	0.71	512.48	-101.55
4	720	0.64	457.57	356.02
5	320	0.57	181.58	537.60
6	720	0.51	364.77	902.38
Discounted Payback Period = 3 years + 101.55/356.02 years
		=3 years + 0.29 years
		3.29 years
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