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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.5 and 3.5 years, respectively.

Time: 0 1 2 3 4 5 6 Cash flow: –$4,500 $1,150 $2,350 $1,550 $1,550 $1,350 $1,150

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) Should it be accepted or rejected?

Answer 1

Rejected since payback is more than 2.5

Payback	2.65
Discounted Payback	3.17

Workings

Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year
Discounted Payback = Year in which Discounted Cumulative CF is last negative -(Last negative discounted cumulative CF/ CF of next year)

Year	Cash flow	Cumulative CF	DCF	Cumulative DCF
0	-4500	-4500	-4500.00	-4500.00
1	1150	-3350	1064.81	-3435.19
2	2350	-1000	2014.75	-1420.44
3	1550	550	1230.44	-190.00
4	1550	2100	1139.30	949.30
5	1350	3450	918.79	1868.08
6	1150	4600	724.70	2592.78

AutoSave o 9.3HD Book1 - Excel Sign in - 0 X File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Comments - 11 A = = 0 £47 Calibri BIU - B -A A = E Insert - Delete - Format Paste LE- - General 3$ -% Number . Conditional Format as Formatting Table - Styles Cell Styles Sort & Find & Filter - Select - Editing Clipboard Font Alignment Cells B1 X for Year н A Year Cumulative DCF =E2 Cash flow -4500 1150 2350 1550 1550 1350 1150 Cumulative CF =C2 =D2+C3 =D3+C4 D4+ 5 =D5+C6 =D6+C7 =D7+C8 E DCF =C2/1.08^B2 =C3/1.084B3 =C4/1.084B4 =C5/1.084B5 =C6/1.084B6 =C7/1.084B7 =C8/1.084B8 =F2+E3 =F3+E4 =F4+E5 =F5+E6 =F6+E7 =F7+E8 Payback Discounted Payback =B4-D4/C5 =B5-F5/E6 Sheet1 Sheet2 Sheet4 Sheet3 Sheets Sheet6 Sheet7 Sheet8 Sheet9 Ready E + 100% -- - U ENG 5:04 AM 2 ^