Answer:
1. 4 years
2. No
Explanation:
Payback period calculates the amount of time to recoup the total investment made on a project. It calculates how long the cash flows generated from a project would cover the cost of the project.
The cost of the project is $500,000
Cash flows are $125,000 per year for 10 years.
In the first year, the cost of the project is reduced by $125,000 and becomes $375,000.
In the second year, the cost of the project is reduced by $125,000 and becomes $250,000.
In the third year, the cost of the project is reduced by $125,000 and becomes $125,000.
In the fourth year, the cost of the project is reduced by $125,000 and becomes $0.
The cost of the project is totally recouped in the 4th year. therefore, the payback period is 4 years.
But the company has a preferred payback period of 3 years ,therefore , the firm won't undertake the project because the payback period is more than 3 years.
