Question

Aster Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $800,000 and yield the following expected cash flows. Management requires investments to have a payback period of two years, and it requires a 10% return on its investments. Period Cash Flow 1 $300,000 2 350,000 3 400,000

Answer 1

Answer:

This question is incomplete. However, since it is talking about payback period. You can calculate it as shown below.

Explanation:

Payback period is the number of years it takes a project's expected future cash inflows to fully recover the initial amount invested.

Year    CF                  Net CF

0        -800,000        -800,000

1        300,000         300,000 -800,000 = -500,000

2        350,000          350,000 -500,000 = -150,000

3        400,000         400,000-150,000 = 250,000

Payback period = Last year with negative net CF + (absolute net CF that year/ total CF the following year)

Payback period = 2 + (150,000/400,000)

= 2 +0.375

= 2.375

Therefore, it will take 2.38 years which is more than the required 2 years so you should reject this project.