A.Compute the payback period statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown in the chart if the maximum allowable payback is four years.

Year

0

1

2

3

4

5

Cash Flow

-1,450

250

380

620

1,000

100

Cumulative Cash Flow

-1450

-1,200

-820

-200

800

900

As shown above, the cash flow will switch from negative to positive between the third and fourth year. Using the formula PB = 3 + 200/1000 = 3.2 years. This project should be accepted.

Distinguished-level:

A.If the discounted payback period were computed, identify if it would be less than, equal to, or greater than the non-discounted payback period.

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