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