Payback period Jordan Enterprises is considering a capital expenditure that requ

Question

Payback period Jordan Enterprises is considering a capital expenditure that requires an initial investment of $38,000 and returns after-tax cash infows of $7.988 per year for 10 years. The firm has a maximum acceptable payback period of 8 years a. Determine the payback period for this project b. Should the company accept the project? a. The payback period for this project is years. (Round to two decimal places.) company accept the project? (Select the best answer below.) O A. The company should reject the project since the payback period is less than the number of years of the after-tax cash fows O B. The company should accept the project since the payback period is less than the maximum O c. The company should reject the project since the after-tax cash fiows occur for more years than the maximum acceptable payback 0 D. The company should reject the project since the payback period is less than the maximum. ? E. The company should accept the project since the after-tax cash flows occur for more years th

Explanation / Answer

a) In case of after tax cash inflows every year, payback period is computed as -

Payback period = Initial investment / Annual after tax cash inflows = $38,000 / $7,988 = 4.76 years

b) Decision criteria for payback period : If actual payback period of project is less than target payback period then accept the project, otherwise reject it.

In our case, since payback period is less than 6 years, the company should accept the project. (Option B)

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