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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. (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
Expert Solution
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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