Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discou payback is three years. Time: 1 3 4 Cash flow: -1,000 500 480 400 300 150 Multiple Cholce 3.49 years, reject 4.98 years, reject 249 years, accept 298 years, accept
Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discou payback is three years. Time: 1 3 4 Cash flow: -1,000 500 480 400 300 150 Multiple Cholce 3.49 years, reject 4.98 years, reject 249 years, accept 298 years, accept
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Project X Discounted Payback Period Analysis
**Objective:** Compute the discounted payback statistic for Project X and determine whether the firm should accept or reject the project, given a cost of capital of 10 percent and a maximum allowable discounted payback of three years.
#### Cash Flow Table
| Time | 0 | 1 | 2 | 3 | 4 | 5 |
|------|------|-----|-----|-----|-----|-----|
| Cash Flow | -1,000 | 500 | 480 | 400 | 300 | 150 |
#### Instructions
- **Determine the discounted payback period:** Calculate the number of years required to recover the initial investment of -1,000 through discounted cash flows, considering a 10% cost of capital.
- **Decision Criteria:**
- If the discounted payback period is less than or equal to 3 years, accept the project.
- If it exceeds 3 years, reject the project.
#### Options
1. **3.49 years, reject**
2. **4.98 years, reject**
3. **2.49 years, accept**
4. **2.98 years, accept**
#### Analysis
- **Time Value of Money:** The cash flows need to be discounted to their present values to account for the cost of capital.
- **Discounting Formula:**
- Present Value = Future Cash Flow / (1 + r)^n
- Where `r` is the discount rate (10%), and `n` is the year number.
- **Determining Discounted Payback Period:**
1. Calculate the present value of each future cash flow.
2. Accumulate these present values until the initial investment is recovered.
- **Final Decision:** Choose the option that fits the calculated discounted payback period against the project criteria.
By using the data provided and following the instructions, you'll be able to identify the appropriate action for Project X based on the discounted payback method.
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