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: | –$242,000 | $66,500 | $84,700 | $141,700 | $122,700 | $81,900 |
Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)
Payback=___year
Year | Cash flows | Cumulative Cash flows |
0 | (242,000) | (242,000) |
1 | 66,500 | (175500) |
2 | 84,700 | (90800) |
3 | 141700 | 50900 |
4 | 122700 | 173600 |
5 | 81900 | 255,500 |
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=2+(90800/141700)
=2.64 years(Approx).
Hence since payback is less than 3 years;project must be accepted.
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 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: –$242,000 $66,500 $84,700 $141,700 $122,700 $81,900 IRR=____%? round your final answer to 2 decimal places.)
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