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Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7 percent and the maximum allowable discounted payback period is three years
Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7 percent and the maximum allowable discounted payback period is three years. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project c Time: Cash flow: 0 -$2,500 1 $1,080 2 $930 3 $970 4 $600 5 $400 Discounted payback period years Should the project be accepted or rejected? accepted O rejected
Expert Solution
| Year | Cash flows | PV @ 7% | Discounted Cash Flows | Cummulative Discounted Cash Flows |
| 0 | -2500 | 1 | -2500 | -2500.00 |
| 1 | 1080 | 0.934579 | 1009.35 | -1490.65 |
| 2 | 930 | 0.873439 | 812.30 | -678.36 |
| 3 | 970 | 0.816298 | 791.81 | 113.45 |
| 4 | 600 | 0.762895 | 457.74 | 571.19 |
| 5 | 400 | 0.712986 | 285.19 | 856.38 |
Discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period)
Discounted Payback period = 2 + |-678.36 | ÷ 791.81
= 2 + 678.36 ÷ 791.81
= 2 + 0.86
= 2.86Yrs
Since maximum allowable discounted payback period is 3 years and Discounted Payback period of Project C is less than 3 years , So the project should be accepted .
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