What is drawback or limitation of using the payback period

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Reference no: EM131180613

A firm has an opportunity to invest in a project to install new production equipment. It will cost them $1,500,000 upfront to purchase and install the equipment. The firms cost of capital is 7%. It is expected that the increased cashflow from the new equipment (above what the current cashflows are) will be as follows: Yr 1: $500,000 Yr 2, $1,000,000 Yr 3 $1,000,000 Yr 4: $600,000 Yr: 5 $500,000. What is the payback period? What is the drawback or limitation of using the payback period to choose projects?

Reference no: EM131180613

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