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

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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 Cashflow: –$240,000, $66,300, $84,500, $141,500, $122,500, $81,700

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4.0 Ratings (773 Votes)

i ii iii iv v=iv*ii vi
year Cash flow Cumulative cash flow PVIF @ 11% present value Cumulative present value
0        (240,000)        (240,000)     1.0000        (240,000)            (240,000)
1            66,300        (173,700)     0.9009            59,730            (180,270)
2            84,500          (89,200)     0.8116            68,582            (111,688)
3          141,500            52,300     0.7312          103,464                (8,225)
4          122,500          174,800     0.6587            80,695                72,470
5            81,700          256,500     0.5935            48,485              120,955
NPV =          120,955
Payback period =                2.63 year
=2+89200/141500
discounted payback=                3.10 year
=3+8225/80695
We can see that payback period and discounted payback period both are lower than the maximum allowable limit
Therefore project should be accepted.

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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: 0 1 2 3 4 5 Cashflow: –$240,000, $66,300, $84,500, $141,500, $122,500, $81,700

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