Question

# A project has the following cash flows. Should the company accept this project based on the...

A project has the following cash flows. Should the company accept this project based on the Payback Period if the firm requires a payback of 3.0 years?

Year Cash Flow

0 -\$28,000

1 11,600

2 11,600

3 6,500

4 6,500

 Yes, because the Payback Period is 3.33 years
 Yes, because the Payback Period is 2.74 years
 No, because the Payback Period is 2.74 years
 Yes, because the Payback Period is 2.49 years

 Year 0 1 2 3 4 Cashflow (28,000) 11,600 11,600 6,500 6,500 Cumulative cashflow (28,000) (16,400) (4,800) 1,700 8,200

Payback Period = last period with negative cash flow (A) + (absolute value of cumulative cash flow at the end of the period A / total cash flow during the period after A)

Here year 2 is the last period with negative cash flow .

Payback Period = 2 + (4800/6500)

= 2 +.74

Payback Period = 2.74 years

Company accept this project, because the Payback Period is 2.74 years which is lower than the required payback of 3 years