A firm has an opportunity to invest in a project to install new production equipment.

It will cost them $1,500,000 upfront to purchase and install the equipment. The firms cost of capital is 7%. It is expected that the increased cashflow from the new equipment (above what the current cashflows are) will be as follows:

Yr 1: $500,000

Yr 2, $1,000,000

Yr 3 $1,000,000

Yr 4: $600,000

Yr: 5 $500,000

1. Whatisthepaybackperiod?Showyourcalculation.
2. Whatisthedrawbackorlimitationofusingthepaybackperiodtochooseprojects?