Reference no: EM132616779

Problem 1. Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent and the maximum allowable payback is 3 years.

Time:           0            1         2          3          4            5

Cash flow:-2,600        875   700        950         875       500

a. 2.09 years accept

b.3.09 years accept

c 3.09 years reject

d2.09 years reject

Problem 2. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

Time               0          1          2          3        4        5       6

Cash Flow   -1,170         10      590      790      790   390     790

a. 751.05 accept

b. -648.95 reject

c. 856.20 accept

d. 2026.26 accept