Question

You are evaluating a project that will cost $ 546 comma 000​, but is expected to produce cash flows of $ 127 comma 000 per year for 10 ​years, with the first cash flow in one year. Your cost of capital is 11.1 % and your​ company's preferred payback period is three years or less. a. What is the payback period of this​ project? b. Should you take the project if you want to increase the value of the​ company?

Answer 1

A 4.3 years

B. The company shouldn't carry out the project because the payback period is greater than the preferred payback period.

Step-by-step explanation:

Payback period calculates the amount of time it takes to recover the amount invested in a project from its cumulative cash flows.

Payback period = amount invested / cash flows

$546,000 / $127,000 = 4.3 years

The company shouldn't carry out the project because the payback period is greater than the preferred payback period.

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