Cirta Corporation is an Emarati company which is considering investing in an new agricultural project. The initial cost of the project is AED 1200 millions. Table 1 below shows the estimated revenues and expenses of the project for first 3 years of its operations. There are no corporation taxes and the company is funded 100% with equity.

Table 1: Estimated revenues and expenses (All figues are in AED million)

Year 1 Year 2 Year 3

Revenue 2,400 /1,680 /4,600

Operating Expenses 1,710 /1,830 /2,110

Depreciation Expense 400 /400 /400

Required:

A. Calculate Cash Flows for Years 0 to 3 of the project. (8 marks)

B. Calculate the payback period of the project (assume the cut off / target time period is 3 years) (8 marks)

C. Should the company accept or reject the project? Justify your answer. (2 marks)

D. Identify TWO disadvantages of the payback period rule.