Question

Ramsas Co. is considering a $230,000 investment, which will provide net returns

of $100,000, $150,000, and $190,000 in the second, third, and fourth years,
respectively.
The company has a payback rule of 3 years. Should the company undertake the
investment?
Use the following table:
Year
O a. No
O b. Yes
Cash
Outflow
Cash
Inflow
Net Cash
Flow
Cumulative Cash
Flow

Answer 1

Ramsas Co. should undertake the $230,000 investment as the cumulative cash flow exceeds the initial investment within the 3-year payback period as per the company's rule.

Step-by-step explanation:

The subject of this question is whether Ramsas Co. should undertake a $230,000 investment which provides net returns over three years.

To determine this, we need to calculate the payback period and compare it to the company's rule of 3 years.

The net returns for the second, third, and fourth years are $100,000, $150,000, and $190,000, respectively. Accumulating these returns over the years:

• End of Year 2: $100,000 (cumulative)
• End of Year 3: $100,000 + $150,000 = $250,000 (cumulative)
• End of Year 4: $250,000 + $190,000 = $440,000 (cumulative)

The cumulative cash flow equals the initial investment of $230,000 at some point between the end of Year 2 and the end of Year 3.

Since this is within the company's payback rule of 3 years, Ramsas Co. should undertake the investment.