Question

Project A is currently being considered by your company. It has the following projected cash flows:

                Year                       Project A                              

                  0                         -$300,000            

                  1                              90,000                                       

                  2                              90,000                                     

                  3                             110,000                                       

                  4                             110,000

The required rate of return for this project is 10 percent.

                                                                                                                                                              

Payback Period: Hurdle rate: 3.25 years

Document the number of years (and partial years you calculate for it to payback for full or partial credit.  

Accept or Reject?

Answer 1

Cash Flows:
Year 0 = -$300,000
Year 1 = $90,000
Year 2 = $90,000
Year 3 = $110,000
Year 4 = $110,000

The company will recoup initial investment of $90,000 in first year, $90,000 in second year, $110,000 in third year and remaining $10,000 in fourth year

Payback Period = 3 + $10,000/$110,000
Payback Period = 3.09 years

The company should accept this project as its payback period (3.09 years) is less than the minimum required payback period (3.25 years).