The LoveLivingInParadise Company wants to calculate how long it will take to recover their initial investment on a project, Project X. It is assumed that the estimated cash flows are received evenly throughout the year.
Year 1 $53,000
Year 2 $42,000
Year 3 $30,000
Year 4 $ 100,000
a) (5 pts) What is the payback period? (Give partial year to two decimal places. SHOW ALL WORK FOR FULL CREDIT).
b) (2 pts) Compared to another project, Project Y, with a payback period of 3 years, which project should be chosen?
c) (3) In evaluation of Project X, what is the primary drawback of the payback method?