Question

Suppose your firm is considering investing in a project with the accompanying cash flows, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.
Time: 0 1 2 3 4 5

Cashflow -$175,000 -$65,800 $94,000 $41,000 $122,000 $81,200

Choose any one of the capital budgeting decision methods discussed Chapter 13, evaluate this project and decide whether the project should be accepted or not based on the capital budgeting method you use. Please show how you calculate a variable: NVP

Answer 1

Answer:

REJECTED

It fails the payback test.

Explanation:

first, we check if payback occurs at year 3;

payback:

-175,000

 -65,800

 +94,000

  +41,000

-105,800

the cashflow until year 3 aren't positive thus, the payback is not achieve

As the discount paymback will make the future cash inflow lower than nominal; the discounted payback will also not be achieve.

Last, let's check if the net present value of the project at 11% is positve:

$\frac{cashflow}{(1 + rate)^{time} } = PV$

$\left[\begin{array}{ccc}Year&cashflow&PV\\0&-175000&-175,000\\1&-65800&-59,279.28\\2&94000&76,292.51\\3&41000&29,978.85\\4&122000&80,365.18\\5&81200&48,188.25\\&TOTAL&545.51\\\end{array}\right]$

The project achieve a psoitive value at the discount rate of 11%

But, It will be rejected as it fails the payback tests.