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A project being considered would require a machine costing $80,000. Market research of $8,000 has already been carried out and has been capitalised. The result is that the project is expected to last for six years and produce net cash inflows of $20,000 for each of the first three years, and then $15,000 for each of the last three years. At the end of the project, the machine will be scrapped for $4,000.
Assume that cash flows arise evenly during the year.
Required:Payback period.
Sir i dont understand why they included 8000 research cost in initial investment as they are sunk cost they should not be includedIf we were appraising using the discounted cash flow approach, then without question the research would be a sunk cost and would be irrelevant.
For payback period there isn’t actually a strict rule although I would certainly also ignore the research cost.
I wouldn’t get too worried about the payback period – it is rarely asked in Paper FM (because it was examined fully in Paper MA) and even when it is asked it always carries very few marks.
Are you watching my free lectures? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Sir you don’t need to tell me about lectures…..that’s in a positive sense
Don’t you remember me from f3 paper
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