Determine its payback period

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A new fishing project requires initial investment of $30,000 to purchase fishing boat and additional $2,000 to fix it up ready for sailing. The boat falls in 3-year class MACRS depreciation. The MACRS depreciation rates are 33%, 45%, 15% and 7% over years 1 - 4 respectively. The boat has economic life of five years. At the end of the five years, the boat can be sold for $3,000. Inventory of supplies needed requires $5,000 at the start.

The project is expected to generate revenue of $20,000 during the first year and revenue grows at 10% rate every year until year 5. Operating costs amount to 50% of revenue. The marginal tax rate on this project is 20% and the appropriate discount rate is 12%. Prepare the yearly cash flow projections for this project and determine if it is worth undertaking. Also determine its payback period.

Reference no: EM132386301

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