Question

Compute the payback statistic for project B and decide whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable payback is three years.
Time 0 1 2 3 4 5Cash
Flow -$11,000 $3,350 $4,180 $1,520 $0 $1,000

Answer 1

Answer:

The project has no payback period

it should be rejected

Explanation:

Payback period calculate the number of years it would take to recover the amount invested in a project from its cumulative cash flows.

Amount invested = -$11,000

Amounted recovered in the 1st year = -$11,000 + $3,350 = -$7650

Amounted recovered in the 2nd year = -$7650 + $4,180 = -$3470

Amounted recovered in the 3rd year =  -$3470 + $1,520 = -$1950

Amounted recovered in the 4th year = -$1950 + 0 = -$1950

Amounted recovered in the 5th year = -$1950 + $1000 = -$950

The amount invested is never recovered. the project isn't profitable and should be rejected