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Should the company proceed with the investment or not

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Reference no: EM133075551

Question - A company is deciding whether to go ahead with an investment or not. An initial cash outflow in the amount of $5,000,000 is required, and the following future cash flows are expected:   

At the end of year 1: $500,000

At the end of year 2: $2,000,000

At the end of year 3: $4,000,000

At the end of year 4: -$1,500,000

a. The company only accepts investments with a payback of up to three years. Based on the payback rule, should the company proceed with the investment or not? Show your calculation.   

b. The company would also like to evaluate the investment opportunity with the use of the internal rate of return method. Is it a good idea to use the internal rate of return in this case? Explain. You do not have to calculate the internal rate of return.

Reference no: EM133075551

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