Project Alpha requires an initial investment of $120,000. It has positive cash f
ID: 2653858 • Letter: P
Question
Project Alpha requires an initial investment of $120,000. It has positive cash flows of $145,000 for each of the next two years. Because of major demolition and environmental clean-up costs, there is a negative cash flow for the third and final year for the project of $(175,000). The project has a required return of 0.1200, and the company's weighted average cost of capital (WACC) is 0.0900. The company accepts all projects with a payback period of 2 years or less. Thus:
The payback rule would reject this project because of its risks are too high.Explanation / Answer
The payback rule would reject this project because of its risks are too high.
As there is negative cash flows in year 3 & 4 , the project would have been rejected.
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