Question

Allegheny Steel Corp. is considering a 9-year project with an initial cost of $38,000 and total Project Cash Flows of $9,400 each year of the project. The required return is 15% and discounted payback needs to be 5 years or less. Reject based on discounted payback Accept based on discounted payback Payback cannot be calculated Accept based on NPV Reject based on NPV

Answer 1

Ans Reject based on discounted payback (Since discounted payback period exceed required payback period of 5 years) and Accept based on NPV (Since NPV is positive)

Year	Project Cash Flows (i)	DF@ 15%	DF@ 15% (ii)	PV of Project A ( (i) * (ii) )	Cumulative Cash Flow
0	-38000	1	1	(38,000.00)	(38,000.00)
1	9400	1/((1+15%)^1)	0.870	8,173.91	(29,826.09)
2	9400	1/((1+15%)^2)	0.756	7,107.75	(22,718.34)
3	9400	1/((1+15%)^3)	0.658	6,180.65	(16,537.68)
4	9400	1/((1+15%)^4)	0.572	5,374.48	(11,163.20)
5	9400	1/((1+15%)^5)	0.497	4,673.46	(6,489.74)
6	9400	1/((1+15%)^6)	0.432	4,063.88	(2,425.86)
7	9400	1/((1+15%)^7)	0.376	3,533.81	1,107.95
8	9400	1/((1+15%)^8)	0.327	3,072.88	4,180.82
9	9400	1/((1+15%)^9)	0.284	2,672.07	6,852.89
		NPV		6,852.89
Discounted Payback Period =		6 years + 2425.86/3533.81
		6.69 years