A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of ________ years for this project, you should ________ the project.
A) 1.98; accept
B) 1.79; accept
C) 2.46; accept
D) 2.02; reject
E) 2.29; reject

Question

Quizplus · Accepted Answer

To calculate the payback period, we calculate the cumulative cash flows until they exceed the initial investment of $108,000: 
Year 0: -$108,000
Year 1: -$108,000 + $52,800 = -$55,200
Year 2: -$108,000 + $52,800 + $53,200 = -$2,000
Year 3: -$108,000 + $52,800 + $53,200 + $83,100 = $81,100
The payback period is between Year 2 and Year 3, which means it is 2 + ($2,000/$83,100) = 2.024 years. Since this is greater than the required payback period of 2 years, the project should be rejected. Therefore, the best choice is option D.

A Project Has Cash Flows of -$108,000, $52,800, $53,200, and $83,100