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Homework answers / question archive / Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the maximum allowable payback period is four years

Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the maximum allowable payback period is four years

Finance

Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the maximum allowable payback period is four years. (Round your answer to 2 decimal places.) Project A Time: Cash flow: 0 -$1,200 1 $430 2 $540 3 $560 $340 5 $140 Payback years Should the project be accepted or rejected? O accepted O rejected

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Payback period:

Payback period is the period in which initial investment is recovered.

PBP = Year in which least +ve Closing Balance + [ Closing balance at that year / Cash flow in Next Year ]
If Actual PBP > Expected PBP - Project will be rejected
Actual PBP </= Expected PBP - Project will be accepted

Year Opening Balance Cash Flow Closing Balance
               1 $            1,200.00 $              430.00 $                770.00
               2 $               770.00 $              540.00 $                230.00
               3 $               230.00 $              560.00 $              -330.00
               4 $              -330.00 $              340.00 $              -670.00
               5 $              -670.00 $              140.00 $              -810.00

PBP = Year in which least +ve Closing Balance + [ Closing balance at that year / Cash flow in Next Year ]
= 2 Years + [ $ 230 / $ 560 ]
= 2 Years + 0.41 Years
= 2.41 Years

Payback Period is 2.41 Years

PBP Refer Payback Period

Actual pay back period < Acceptable Pay back period. Hence project can be accepted.

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