Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half four and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | }
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \begin{array} { l }
\text { Cash } \
\text { Flow }
\end{array} & - \$ 5,000 & \$ 1,300 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \
\hline
\end{array}$$
A)Payback = 4.44 years; reject
B)Payback = 3.44 years; accept
C)Payback = 3.54 years; reject
D)Payback = 3.24 years; reject

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half four and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \begin{array} { l } 
\text { Cash } \
\text { Flow }
\end{array} & - \$ 5,000 & \$ 1,300 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \
\hline
\end{array}$$
A)Payback = 4.44 years; reject
B)Payback = 3.44 years; accept
C)Payback = 3.54 years; reject
D)Payback = 3.24 years; reject

Quizplus · Accepted Answer

The payback period is calculated by summing the cash flows until the initial investment is recovered. In this case, the payback period is 3.44 years, which is less than the maximum allowable payback period of 3.5 years, so the project should be accepted.

Suppose Your Firm Is Considering Investing in a Project with the Cash