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

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 9 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: −\$5,100 \$1,280 \$2,480 \$1,680 \$1,680 \$1,480 \$1,280

Use the discounted payback decision rule to evaluate this project

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Cumulative PV of cash flow will switch from negative to positive between years 3 and 4.

 Year 0 1 2 3 4 Cash flow: −\$ 5,100 \$ 1,280 \$ 2,480 \$ 1,680 \$ 1,680 Cash flow PV: −\$ 5,100 \$ 1,174 \$ 2,087 \$ 1,297 \$ 1,190 Cum. cash flow PV: −\$ 5,100 −\$ 3,926 −\$ 1,838 −\$ 541 \$ 649
 Specifically, DPB = 3 + \$541 = 3.45 years, which is less than the maximum allowable discounted payback of 3.5 years, so this project should be accepted. \$1,190