The Baker Company is trying to determine the viability of a new project and want
ID: 2614075 • Letter: T
Question
The Baker Company is trying to determine the viability of a new project and wants to use the payback rule to make this decision. The initial cash outlay for the project is expected to be $1,500,000 and will return $275,000 a year, starting at the end of the first year. In order to be a worthwhile venture, they need to see a positive return within 6 years.
What is the payback period? ___________
Using the payback rule, should they pursue this project? _____________
What are an advantage and a disadvantage of using the payback rule to evaluate a project or investment?
Advantage: _____________________________________________________________________
_______________________________________________________________________________
Disadvantage: ___________________________________________________________________
_______________________________________________________________________________
Explanation / Answer
Payback year is the period in which you recover the initial investment
So payback year of this project is 6 years as in 6 years you will earn = 275000 * 6 = 1650000
Yes we will choose this project on basis of payback period
Advantage
Easy to calculate .
Easy to understand and comprehend
Disadvantage
Doesn't takes care of time value of money . As $100 today isn't equal to $100 after 2 years .
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