Question

Consider the following table that shows expected annual cash flows from a proposed investment.

Year	Cash Flow
0	–$70
1	$20
2	$30
3	$30
4	$30

If the annual required return is 15%, what is the payback period of the project (rounded to the first decimal)? If the firm’s cutoff discounted payback period is 3 years, should it accept the project?

Answer 1

Ans Payback period = 2.7 years

Year	Cash Flow	Cumulative Cash Flow
0	-70	-70
1	20	-50
2	30	-20
3	30	10
4	30	40
TOTAL	40
Payback Period =	2 years + 20/30
	2.7 years

Discounted Payback Period = 3.6 years

Since Discounted payback period of 3.6 years is more than the acceptable period the project must be rejected.

Year	Project Cash Flows (i)	DF@ 15%	DF@ 15% (ii)	PV of Project A ( (i) * (ii) )	Cumulative Cash Flow
0	-70	1	1	(70.00)	(70.00)
1	20	1/((1+15%)^1)	0.870	17.39	(52.61)
2	30	1/((1+15%)^2)	0.756	22.68	(29.92)
3	30	1/((1+15%)^3)	0.658	19.73	(10.20)
4	30	1/((1+15%)^4)	0.572	17.15	6.95
		NPV	6.95
Discounted Payback Period =		3 years + 10.20/17.15
		3.6 years