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29 December, 20:52

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

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  1. 29 December, 23:07
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    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.
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