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Homework answers / question archive / Compute the 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 11 percent and the maximum allowable payback is three years
Compute the 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 11 percent and the maximum allowable payback is three years. Time: 0 1 2 3 4 5 Cash flow: -375 75 125 100 75 375 Select one: O A. 4 years, accept O B. 2 years, reject O C. 3 years, accept O D. 1 year, accept O E. 1 year, reject O F. 5 years, reject O G. 3 years, reject O H. 5 years, accept O 1. 2 years, accept O J. 4 years, reject
ANSWER- J 4 Years Reject
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=4 years
Hence since payback is greater than 3 years;project must be rejected.
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