A firm considers an investment whose cost is $ 3 000 000 which is paid in 2022. The expected cash flows from this investment are as follows:
2023 $ 500 000
2024 $ 700 000
2025 $ 1 000 000
2026 $ 1 000 000
2027 $ 800 000
2028 $ 600 000
The firm’s desired target payback period is 3 years which means that firm accepts all projects with a payback period less than 3 years.
a) Find the exact payback period of this investment on the basis of simple payback period.
b) Should the firm accept or reject this investment (give your answer simply as accept or reject)
Note: Notice that I want to see the exact payback period which means you need to use interpolation. See my written notes to understand how the interpolation is done.