1) A firm considers an investment whose cost is $ 3 000 000 which is paid in 2020. The expected cash flows from this investment are as follows:

2021 $ 500 000

2022 $ 700 000

2023 $ 1 000 000

2024 $ 1 000 000

2025 $ 800 000

2026 $ 600 000

The firms desired target payback period is 3 years which means that firm accepts all projects with a payback period less than 3 years.

a) Find the exact payback period of this investment on the basis of simple payback period.

b) Should the firm accept or reject this investment (give your answer simply as accept or reject)

Note: Notice that I want to see the exact payback period which means you need to use interpolation. See my written notes to understand how the interpolation is done.

2) Let us consider the same investment whose cost and expected cash flows are given in Question 1 using discounted payback period.

a) What is the exact payback period of that investment according to the discounted payback method if the relevant discount rate for that investment is 14%

b) Should the firm accept or reject this investment if the desired payback period of the investment is 3 years.