1- ABC Inc. has gathered projected cash flows for a potential project. The required rate of return for the project is 13%. Using the NPV decision rule, should the firm accept the project? Why? Using the IRR decision rule, should the firm accept the project? Why? Using the payback period decision rule, should the firm accept the project, if the payback cutoff is 4.25 years? Why? Using the discounted payback period decision rule, should the firm accept the project, if the discounted payback cutoff is 4.75 years? Why? (Show your calculations for all of the investment criteria.) CF0 = -$400,000 CF1 = -$104,000 CF2 = -$106,000 CF3 = $220,000 CF4 = $337,000 CF5 = $392,000

Answer:

PP = (-104,000/-104,000) + (-106,000/-106,000) + (220,000/220,000) + (337,000/337,000) + (53,000/392,000) = 4.1352 years The firm should accept the project since the payback period is less than the cutoff period of 4.25 years

Where did 53,000 come from?