Payback period: Jordan Enterprises is considering a capital expenditure that req

Question

Payback period: Jordan Enterprises is considering a capital expenditure that requires an initial investment of $29,000 and returns after-tax cash inflows of $4,998 per year for 10 years. The firm has a maximum acceptable payback period of 8 years.

a.The payback period for this project is_____ years.(Round to two decimal places.)

b.Should the company accept the project?(Select the best answer below.)

A. The company should reject the project since the after-tax cash flows occur for more years than the maximum acceptable payback.

B. The company should accept the project since the payback period is less than the maximum.

C. The company should reject the project since the payback period is less than the maximum.

D. The company should reject the project since the payback period is less than the number of years of the after-tax cash flows.

E. The company should accept the project since the after-tax cash flows occur for more years than the maximum acceptable payback

Explanation / Answer

Answer a.

Initial Investment = $29,000
Annual Cash Inflow = $4,998

Payback Period = Initial Investment / Annual Cash Inflow
Payback Period = $29,000 / $4,998
Payback Period = 5.80 years

Answer b.

The company should accept the project since the payback period is less than the maximum.

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