China Importers would like to spend $221,000 to expand its warehouse.However,the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $221,000 at that time.The warehouse expansion project is expected to increase the cash inflows by $58,000 in the first year,$139,000 in the second year,and $210,000 a year for the following 2 years.Should the firm expand at this time? Why or why not?
A)Yes, because the money will be recovered in 1.69 years
B)Yes, because the money will be recovered in 1.87 years
C)Yes, because the money will be recovered in 2.11 years
D)No, because the project never pays back
E)No, because the money will not be recovered in time to repay the loan

Question

Quizplus · Accepted Answer

Payback = 2 + ($221,000 - $58,000 - $139,000)/$210,000 = 2.11 yearsYes, the company should buy the equipment because it pays back within the required 2.5 years.

China Importers Would Like to Spend $221,000 to Expand Its