Question

J&E Enterprisesi s considering and investment which produces no cash flows for the first year. In the second year, the cash inflow is $47,000. This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently. The initial investment will cost $318,000. The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years. Should the project be accepted. Why or why not?
Year Cash flow Discounted cash flo Cumulative cash flo

1 $0 $0.00 $0.00
2 $47,000 $35,321.72 $35,231.72
3 $198,000 $128,504.77 $163,736.49
4 $226,000 $126,993.21 $290,729.70

Answer 1

Answer:

No

The amount of cumulative discounted cash flows is less than the the amount invested in the project. This means that the project is unprofitable.

Explanation:

The discounted cash flow method calculates how long it takes to recover the amount invested in a project from its cumulative discounted cash flow.

A project should be accepted if the amount invested in the project is recovered from the cumulative discounted cash flow within the period specified by the firm.

The cumulative discounted cash flow, $290,729.70 is less than the amount invested $318,000. So the project shouldn't be accepted.

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