Question

Suppose a company had an initial investment of $45,000. The cash flow for the next five years are $14,000, $10,000, $12,000, $13,000, and $14,000, respectively.

What is the payback period? (Enter your answer rounded to 2 DECIMAL PLACES)
If the firm accepts projects with payback periods 4 years or less, will this project be accepted?
a.Yes
b.No

Answer 1

The payback period for the investment is 4 years, and the project will be accepted.

Step-by-step explanation:

The payback period is the amount of time it takes for an investment to recoup its initial cost. To calculate the payback period, we add up the cash flows until they equal or exceed the initial investment. In this case, the cash flows are $14,000, $10,000, $12,000, $13,000, and $14,000 for the next five years.

Year 1: $14,000

Year 2: $10,000 + $12,000 = $22,000

Year 3: $22,000 + $13,000 = $35,000

Year 4: $35,000 + $14,000 = $49,000

Since the cash flows exceed the initial investment of $45,000 in year 4, the payback period is 4 years.

The project will be accepted because the payback period is 4 years or less.