Question

QUESTION 16 One. Tel Limited (ACN 068 193 153) would like to spend $200,000 to expand its warehouse. However, the company has a loan outstanding that must be paid in 25 years and thus wil need the $200,000 at that time. The warehouse expansion project is expected to increase the cash inflows by 558,000 in the first year, $119,000 in the second your and by $112.000 a year for the following two years. Should the firm expand at this time? Why or why not? Yes, because according to the payback method the money will be recovered in 2.21 years Yos, because according to the payback method the money will be recovered in 2.11 years No, because the money will not be recovered in time to repay the loan. No, because this project never pays back. Yes, because according to the payback method the money will be recovered in 1.60 years.

Answer 1

Option 1 : Yes, because according to the pay back metthod money will be recovered in 2.21 years

First Two rears return (58000+119000) = 177,000

Balance needed from third year (200000-177000) = 23,000

period taking to get 23000 from 3rd year ( 23000/112000) = 0.21years

Total Payback period (2 years + 0.21 Years ) = 2.21years

The payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback period is the length of time an investment reaches a break-even point. The desirability of an investment is directly related to its payback period. Shorter paybacks mean more attractive investments.