Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
A) Yes.
B) No.
C) It depends.
D) None of the above.

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash inflows until the initial investment is recovered. In this case, the cumulative cash inflows by the end of year 3 are $4,400,000, which is less than the initial cost of $5,000,000. By year 4, the cumulative cash inflows are $6,200,000, which exceeds the initial investment, but this occurs after 3.25 years. Therefore, the project does not meet the maximum payback period requirement of 3.25 years.

Should Tangshan Mining Company Accept a New Project If Its