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 statistic for the project are three and three and a half years, respectively. $$\begin{array} { l l l l l l l }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000
\end{array}$$ Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
A)$35,995.86, reject
B)$38,875.53, accept
C)$138,875.53, accept
D)$238,875.53, accept

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 statistic for the project are three and three and a half years, respectively. $$\begin{array} { l l l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000
\end{array}$$ Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
A)$35,995.86, reject
B)$38,875.53, accept
C)$138,875.53, accept
D)$238,875.53, accept

Quizplus · Accepted Answer

To evaluate the project using the NPV decision rule, we need to calculate the present value of all the cash flows and subtract the initial investment of $100,000. Using a financial calculator, we get:

NPV = -$100,000 + $30,000/(1+0.08)^1 + $45,000/(1+0.08)^2 + $55,000/(1+0.08)^3 + $30,000/(1+0.08)^4 + $10,000/(1+0.08)^5

NPV = $38,875.53

Since the NPV is positive, the project should be accepted. The payback period for the project is 3.38 years, which is less than the maximum allowable discounted payback of 3.5 years. Therefore, the project meets both the NPV and discounted payback criteria and should be accepted. The maximum allowable payback period of 3 years is not relevant in this case since the project's cash flows extend beyond 3 years.

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