Question
For a given project, the initial investment is $300,000, the required return for assets of this risk is 12%, and the average book value =
For a given project, the initial investment is $300,000, the required return for assets of this risk is 12%, and the average book value = $95,000.
The cash flows (CF) and net income (NI) in $ for it for 4 years is given below:
Year 1: CF = 87,000; NI = 20,500
Year 2: CF = 97,000; NI = 21,800
Year 3: CF = 107,000; NI = 26,000
Year 4: CF = 102,000; NI = 32,000
A. Calculate the payback period of the above project if the project is given a pre-set limit of 3 years to recover the initial investment. Should the project be accepted or rejected based on the payback period value? Explain.
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