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Payback Period

A project has an initial cost of $500,000 whereas it has an expected annual cash flow of $75,000 each year for the next 10 years. The firm has the criteria of accepting the project if its payback period is 6 years or less. Based on the payback period, state whether the project would be accepted or not?

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Expert Solution

Initial Cash Outlay = $500,000

Annual Cash flow = $75,000

\( \begin{align}\rm\text{Payback Period} &=\frac {Initia \ Cash \ Outlay}{Annual \ Cash \ Inflow }\\ &= \frac {\$500,000}{\$75,000}\\ &= 6.67 \rm\text{ Years}\end{align} \)

Since the payback period of the project is 6 years whereas the decision criteria are that life should be less than or equal to 6 years.

So, the project should be rejected. 

The project should be rejected.

Vinay answered 3 years ago
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