A project that costs $2500.00 to install will provide annual cash flows of $600 for the next six years. The firm accepts projects with payback periods of less than 5 years. Will the project be accepted? Should this project be pursued if the discount rats is 2%? What if the discount rate is 12%? Will the firm's decision change as the discount rate changes?
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Initial investment= $2,500.00
Annual Cash flow= $600.00
Therefore payback period= 4.17 years =2500/600
Since the payback period is less than 5 years the project would be accepted.
Present value of annual cash flow of $600.00 for 6 years
The solution evaluates a project using Net Present Value and Payback period with step-by-step calculations.