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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Time:	0	1	2	3	4	5	6
Cash flow:	–$5,300	$1,300	$2,500	$1,700	$1,700	$1,500	$1,300

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

Discounted payback = ______years

Answer 1

Year	Cash flows	Present value@7%	Cumulative Cash flows
0	(5300)	(5300)	(5300)
1	1300	1214.95	(4085.05)
2	2500	2183.60	(1901.45)
3	1700	1387.71	(513.74)
4	1700	1296.92	783.18
5	1500	1069.48	1852.66
6	1300	866.24	2718.90(Approx).

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(513.74/1296.92)

=3.40 years(Approx).

Hence since discounted payback is less than 4.5 years;project must be accepted.