Question

Should the company accept the​ project? ​(Select the best answer​ below.) A. The company should accept 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 reject the project since the​ after-tax cash flows occur for more years than the maximum acceptable payback.

Answer 1

Answer: a) 5.53 years.

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

Step-by-step explanation:

a) The Payback period of a project is simply the amount of time in which a project is scheduled to pay back the original Investment. It is calculated by dividing the initial investment by the annual cash inflows.

The above project will cost $64,000 and returns​ after-tax cash inflows of ​$11,573 for 10 years.

Calculating the Payback Period is,

= 64,000/11,573

= 5.53 years.

b) It is stated that the firm has a maximum acceptable payback period of 8 years. With a Payback period of 5.53 years, the project will pay back a couple of years before the maximum required length and therefore should be chosen all else being equal.