Book11.xlsx

# Book11.xlsx - SECTION 12-7 SOLUTIONS TO SELF-TEST Project P...

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SECTION 12-7 SOLUTIONS TO SELF-TEST Regular payback Regular payback Years 0 1 2 3 4 | | | | | Cash Flow -950 525 485 445 405 Cas Cumulative Cash Flow -950 -425 60 505 910 Cumulative Cas Regular payback = 1.88 Regular payback = Discounted payback Discounted payb WACC 10% WACC 15% Years 0 1 2 3 4 | | | | | Cash Flow -950 525 485 445 405 Cas Discounted Cash Flow -950 477 401 334 277 Discounted Cas Cumulative Discounted CF -950 -473 -72 262 539 Cumulative Discoun Discounted payback = 2.22 Discounted paybac The payback rule of 3 years leads to a reject decision. The payback rule o NPV = \$539.05 NPV = \$256.72 IRR = 35.54% IRR = 24.78% Project P has a cost of \$1,000 and cash flows of \$300 per year for 3 years plus another \$1,000 in Year 4. The project’s cost of capital is 15%. What are P’s regular and discounted paybacks? If the company requires a payback of 3 years or less, would the project be accepted?

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