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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Business

Bernard Baldwin

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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Chanel · Answer 1

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.