Question

You are evaluating an investment project costing $39,000 initially. The project will provide $3,000 in after-tax cash flows in the first year, $4,000 in the second year and $8,000 each year thereafter for 10 years. The maximum payback period for your company is 7 years.

1. What is the payback period for this project?

2. Should your company accept this project?

Answer 1

Year	Cash Flows	Cumilative Cash Flows
1	3000	3000
2	4000	7000
3	8000	15000
4	8000	23000
5	8000	31000
6	8000	39000
7	8000	47000
8	8000	55000
9	8000	63000
10	8000	71000

Cumilative Cash flows are calculated by adding currrent year cashflows with previous year cashflows.

From the above table we can say that we are recovering our investment of 39,000$ in 6 years.

Since it is given maximum pay back period for comoany is 7 years, but we are recovering it in 6 years we can accept the project.