Suppose your firm is considering investing in a project with the cash flows shown below, that...

Free

70.2K

Verified Solution

Question

Finance

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 11 percent, and that the maximumallowable payback and discounted payback statistics for yourcompany are 3.0 and 3.5 years, respectively
  Time: 0 1 2 3 4 5
  Cash flow –$241,000 $66,400 $84,600 $141,600 $122,600 $81,800
Use the payback decision rule to evaluate this project.(Round your answer to 2 decimal places.)
  Payback years
Should the project be accepted or rejected?
Accepted
Rejected
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 11 percent, and that the maximumallowable payback and discounted payback statistics for yourcompany are 2.5 and 3.0 years, respectively.
  Time: 0 1 2 3 4 5
  Cash flow –$231,000 $65,400 $83,600 $140,600 $121,600 $80,800
Use the discounted payback decision rule to evaluate thisproject. (Do not round intermediate calculations. Roundyour final answer to 2 decimal places
  Discounted payback years
Should it be accepted or rejected?
Rejected
Accepted

Answer & Explanation Solved by verified expert

4.1 Ratings (527 Votes)

Payback period is the time period in which the initial investment is recovered

Time	Cash Flow	Cumulative Cash Flow
0	-241,000	-241,000
1	66,400	-174,600
2	84,600	-90,000
3	141,600	51,600
4	122,600	174,200
5	81,800	256,000

Payback period = 2 + 90,000/141,600

= 2.64 years

Since it is less than acceptable payback period of 3 years, the project should be

ACCEPTED

Time	Cash Flow	PVF	Discounted Cash Flow	Cumulative Discounted Cash Flow
0	-231,000	1	-231,000	-231,000
1	65,400	0.901	58,925.4	-172,074.6
2	83,600	0.812	67,883.2	-104,191.4
3	140,600	0.731	102,778.6	-1,412.8
4	121,600	0.659	80,134.4	78,721.6
5	80,800	0.593	47,914.4	126,636

Discounted payback period = 3 + 1,412.8/80,134.4

= 3.02 years

Since it is more than acceptable discounted payback period of 3.5 years. The project should be

REJECTED

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 11 percent, and that the maximumallowable payback and discounted payback statistics for yourcompany are 3.0 and 3.5 years, respectively Time:012345 Cash flow–$241,000$66,400$84,600$141,600$122,600$81,800Use the payback decision rule to evaluate this project.(Round your answer to 2 decimal places.) PaybackyearsShould the project be accepted or rejected?AcceptedRejected-------------------------------------------------------------------------------------------------------------------------------------------------------------Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 11 percent, and that the maximumallowable payback and discounted payback statistics for yourcompany are 2.5 and 3.0 years, respectively. Time:012345 Cash flow–$231,000$65,400$83,600$140,600$121,600$80,800Use the discounted payback decision rule to evaluate thisproject. (Do not round intermediate calculations. Roundyour final answer to 2 decimal places Discounted paybackyearsShould it be accepted or rejected?RejectedAccepted


Time:	0	1	2	3	4	5
Cash flow	–$241,000	$66,400	$84,600	$141,600	$122,600	$81,800


Time:	0	1	2	3	4	5
Cash flow	–$231,000	$65,400	$83,600	$140,600	$121,600	$80,800