Compute the 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 9 percent and the maximum allowable payback is four years. $$\begin{array} { | l | c | c | c | c | c | c | }
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 1,000 & - 75 & 100 & 100 & 0 & 2,000 \
\hline
\end{array}$$
A)3.4375 years, accept
B)3.78 years, reject
C)4.4375 years, reject
D)4.78 years, accept

Question

Compute the 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 9 percent and the maximum allowable payback is four years. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 1,000 & - 75 & 100 & 100 & 0 & 2,000 \
\hline
\end{array}$$
A)3.4375 years, accept
B)3.78 years, reject
C)4.4375 years, reject
D)4.78 years, accept

Quizplus · Accepted Answer

The payback period is calculated by summing the cash flows until the initial investment is recovered. In this case, the cumulative cash flow becomes positive between years 4 and 5, specifically at 4.4375 years. Since this exceeds the maximum allowable payback period of 4 years, the project should be rejected.

Compute the Payback Statistic for Project X and Recommend Whether