Should Tangshan Mining company accept a new project if the company's maximum payback is 3.5 years and the project's initial after-tax cost is $5,000,000 followed by 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?

Question

Quizplus · Accepted Answer

The payback period of the project can be calculated as follows:
Year 1: $5,000,000 - $1,800,000 = $3,200,000
Year 2: $3,200,000 - $1,900,000 = $1,300,000
Year 3: $1,300,000 - $700,000 = $600,000
Year 4: $600,000 - $1,800,000 = ($1,200,000)
It can be seen that the payback period of the project is just under 3 years. Since this is less than the company's maximum acceptable payback period of 3.5 years, the company should accept the new project.

Should Tangshan Mining Company Accept a New Project If the Company's