1 answer

Compute the payback statistic for Project B if the appropriate cost of capital is 11 percent...

Question:

Compute the payback statistic for Project B if the appropriate cost of capital is 11 percent and the maximum allowable payback period is three years. Should the project be rejected or accepted? (If the project never pays back, then enter a "0" (zero).

Project B
Time: 0 1 2 3 4 5
Cash flow: –$11,700 $3,420 $4,320 $1,660 $0 $1,140

Answers

ation of payback Year Cash flows Cumulative cash flows 0 (S11,700) 1 S3,420 2 S4,320 3S1,660 (S11,700) ($8,280 (S3,960 (S2,300) (S2,300) (S1,160 SO 5 S1,140 Payback period At B/C Here, A = Year in which last negative cumulative cash flow B = Last negative cumulative cash flow C - Normal cash flow immediately next to last negative cumulative cash flow As per above table , we dont have any positve cumulative cash flow.Hence this project has payback perio,d more tha project life. That means it has payback period of more than 5 Years Maximum acceptable payback period - 3 Years Since project actual payback period is more than maximum acceptable payback period, it is better to reject the project.

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