Harlem Toyworld Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $120,000 and the building, which would be erected at the end of the first year (at t = 1), would cost $300,000. It is estimated that the firm’s after-tax cash flow will be $250,000 at the end of the second year (the first cash inflow), and this cash flow will increase at a rate of 20% annually over the next three years (ignore all other cash flows thereafter).

(a) What is the approximate payback period for this investment?

(b) If the firm is cost of capital is 10%, calculate the net present value (NPV) of the project.

(c) Give one disadvantage of the Payback Period technique and one disadvantage of the net present value rule for investment decision-making.