The LoveLivingInParadise Company wants to calculate how long it will take to recover their initial investment on a project, Project X. It is assumed that the estimated cash flows are received evenly throughout the year.
Cost 100,000
Year 1 $53,000
Year 2 $42,000
Year 3 $30,000
Year 4 $ 100,000
a) What is the payback period? (Give partial year to two decimal places. SHOW ALL WORK FOR FULL CREDIT).
b) Compared to another project, Project Y, with a payback period of 3 years, which project should be chosen?
c) In evaluation of Project X, what is the primary drawback of the payback method?