Compute the Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable payback is 1 years.
A) 1.25 years, reject
B) 1.25 years, accept
C) 1.33 years, accept
D) 2.25 years, accept

Question

Compute the Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable payback is 1 years. 
A) 1.25 years, reject 
B) 1.25 years, accept 
C) 1.33 years, accept 
D) 2.25 years, accept

Quizplus · Accepted Answer

To calculate the payback period, we need to find the time it takes for the cumulative cash inflows to equal the initial investment. Using the formula, we find:

Year 1: -$500,000 + $150,000 = -$350,000 remaining
Year 2: -$350,000 + $200,000 = -$150,000 remaining
Year 3: -$150,000 + $250,000 = $100,000 remaining

Therefore, the payback period is 2 years. Since this is greater than the maximum allowable payback of 1 year, the project should be rejected. The correct answer is A) 1.25 years, reject.

Compute the Payback Statistic for Project Y and Recommend Whether