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:	–$236,000	$65,900	$84,100	$141,100	$122,100	$81,300

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

Answer 1

Compute the cash flows andcumulative cash flows

Year	Cash flow	Cumulative CF	Discounted CF	Cumulative Discounted CF
0	-236000		-236000
1	65900	65900	59369.37	59369.37
2	84100	150000	68257.45	127626.82
3	141100	291100	103171.10	230797.92
4	122100	413200	80431.05	311228.97
5	81300	494500	48247.59	359476.56

Payback = Year in which cumulative CF<Initial cost + (Initial cost- cumulative CF)/CF of next year

= 2+ (236000-150000)/141100

=2.61 years

Discounted payback = Year in which Discounted cumulative CF<Initial cost + (Initial cost- Cumulative DCF)/DCF of next year

= 3+ (236000-230797.92)/80431.05

=3.06 years

Since both are less than the limits, the project should be accepted.

WORKINGS

AutoSave Book1 Excel (Product Activation Failed) Sign in 圧 - File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Calibri Number 田F' Insert Delete Format Conditional Format as Cell Formatting Table Paste Styles Filter Select Clipboard Alignment Number Styles Cells Editing E4 1 Year Cash flow Cumulative CF Discounted CF Cumulative Discounted CF 2 0236000 3 1 65900 B3 412 84 100 =C3+B4 5 3141100 C4+B5 6 4122100 C5+ B6 7 5 81300 C6+B7 -B2/1.11MA2 Payback Discounted payback -2+(-B2-C4)/B5 =3+(-D2E5)/D6 -84/1.11*A4 -85/1.11^A5 -B6/1.11A6 -B7/1.11 A7 I=E3tD4 =E4+D5 E5+D6 E6+D7 10 12 13 14 16 17 Sheet1 Sheet2! Sheet3 Sheet4 Ready ENG 10:04 AM