Question

Compute the payback statistic for Project B if the appropriate cost of capital is 12 percent and the maximum allowable payback period is three years. (Round your answer to 2 decimal places. If the project never pays back, then enter a "0" (zero).)

Project B Time: 0 1 2 3 4 5

Cash flow: –$11,300 $3,380 $4,240 $1,580 $0 $1,060

Payback years ___________

Should the project be accepted or rejected? ______________

Answer 1

Payback period = 0 years.................(since the project never paysback).

The project should be rejected.

initial investment to be recovered = $11,300.

the following is the calculation of payback period:

year	cash flow	cumulative cash flow
1	3,380	3,380
2	4,240	7,620
3	1,580	9,200
4	0	9,200
5	1,060	10,260

maximum cumulative cash flow is $10,260..

since the initial investment of 11,300 is never recovered, the project never paysback.