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.
Use the discounted payback decision rule to evaluate this project
Save your time - order a paper!
Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlinesOrder Paper Now
Cumulative PV of cash flow will switch from negative to positive between years 3 and 4.
|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.|