Compute the payback statistic for Project Y 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 11 percent and the maximum allowable payback is one year. $$\begin{array} { | l | c | c | c | c | c | c | }
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 100 & 75 & 100 & 300 & 75 & 200 \
\hline
\end{array}$$
A)1.25 years, reject
B)1.25 years, accept
C)1.33 years, accept
D)2.25 years, accept

Question

Compute the payback statistic for Project Y 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 11 percent and the maximum allowable payback is one year. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 100 & 75 & 100 & 300 & 75 & 200 \
\hline
\end{array}$$
A)1.25 years, reject
B)1.25 years, accept
C)1.33 years, accept
D)2.25 years, accept

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how many years it takes for the cumulative cash inflows to equal the initial investment. Using the given values, the cumulative cash inflows are:

Year 1: -100 + 75 = -25
Year 2: -25 + 100 = 75
Year 3: 75 + 300 = 375
Year 4: 375 + 75 = 450
Year 5: 450 + 200 = 650

Therefore, it takes 1.25 years for the cumulative cash inflows to equal the initial investment. Since this is longer than the maximum allowable payback of one year and the project does not recover its initial cost in time, the recommendation is to reject the project.

Compute the Payback Statistic for Project Y and Recommend Whether