Question

Payback period

Smith Inc. is considering a capital expenditure that requires an initial investment of $35,000 and returns after-tax cash inflows of $6,000 per year for 8 years. The firm has a maximum acceptable payback period of 6 years. a. Determine the payback period for this project. b. Should the company accept or reject the project? Why?

Answer #1

a)Payback period = Initial investment/Annual Cash inflow

=$35,000/$6,000

=5.83 years

b)

As Payback Period is less than accepted payback period the project is acceptable

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