Question

KMB does not understand why mothers only use Kleenex to wipe their kids’ noses when they could be used for so many purposes – wiping dirty hands after playing in the sandbox, wiping faces after eating, etc. They are considering a $3 million investment. If they can convince mothers to use tissues more often then they believe that they can earn an additional $400,000 for the next 10 years. Would you advise them to accept the project? Why? Show your work. Explain your answer.

Answer 1

Ans : Initial investment = $ 3,000,000

Since no discount rate is given, we will see the feasibility of the project based on payback period.

Year	Cash flows	Cummulative cash flows
0	-3000000	-3000000
1	400000	-2600000
2	400000	-2200000
3	400000	-1800000
4	400000	-1400000
5	400000	-1000000
6	400000	-600000
7	400000	-200000
8	400000	200000
9	400000	600000
10	400000	1000000

Payback period = A+B/C

A= is the last period with a negative cumulative cash flow

B = is the absolute value of cumulative cash flow at the end of the period A

C =total cash flow after period A

7 + 200,000 / 400,000

7.5 years

Since the amount is recovered before 10 years. the project is feasible. it can be accepted.