Question

1. If a project costs $100,000  and you will get 20,000 a year for 10 years what is the payback  period . Use the payback method to obtain the payback period.

1. Can you accept a project based on the payback method alone, explain your answer:

2. Can you reject a project based on the payback method alone, explain your answer:

Answer 1

Payback period = Initial investment / annual cash inflows

= 100000/20000

= 5 years

a. No, we acnt not accept a project based on the payback method alone. we have to consider the time value of money also which payback period method not consider. Other methods may be used befor deciding about the project. other methods are, Net present value, profitability index, Internal rate of return etc.

b. Yes. we can reject a project based on the payback method alone when the packback period is more than the standard decided by the company.