Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years. $$\begin{array} { l l l l l l l }
\text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flow: } & - 5000 & 500 & 2000 & 3000 & 1500 & 500
\end{array}$$
A)3.45 years, reject
B)3.86 years, reject
C)3.45 years, accept
D)3.86 years, accept

Question

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years. $$\begin{array} { l l l l l l l } 
\text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flow: } & - 5000 & 500 & 2000 & 3000 & 1500 & 500
\end{array}$$
A)3.45 years, reject
B)3.86 years, reject
C)3.45 years, accept
D)3.86 years, accept

Quizplus · Accepted Answer

The discounted payback period is calculated by discounting each cash flow at the cost of capital (12%) and determining when the cumulative discounted cash flows turn positive. The cumulative discounted cash flows become positive between years 3 and 4, specifically at 3.86 years. Since this exceeds the maximum allowable discounted payback period of 3 years, the project should be rejected.

Compute the Discounted Payback Statistic for Project Y and Recommend