How to Calculate Payback Period for Tangshan Mining Company's New Project

Should Tangshan Mining Company accept a new project based on the given data?

Given the maximum payback period of 3.5 years, an initial after-tax cost of r15,000,000, and expected after-tax operating cash inflows for each year, should Tangshan Mining Company accept the new project?

Answer:

Yes, Tangshan Mining Company should accept the new project.

Explanation:

According to the details provided, Tangshan Mining Company's required payback period is 3.5 years. By calculating the payback period based on the given after-tax operating cash inflows for each year, we can determine whether the project is viable.

We know that:

  • Year 0: Initial after-tax cost = -r15,000,000
  • Year 1: After-tax operating cash inflow = r5,400,000
  • Year 2: After-tax operating cash inflow = r5,700,000
  • Year 3: After-tax operating cash inflow = r2,100,000
  • Year 4: After-tax operating cash inflow = r5,400,000

By calculating the payback period:

Payback period = 3 + (600,000 / 1,800,000) = 3 + 0.33 = 3.33 years

Therefore, Tangshan Mining Company should accept the new project since the calculated payback period of 3.33 years is shorter than the required 3.5 years. This means that the project will take fewer years to fully recover the initial expenditure.

Definition of Payback Period:

The payback period is the length of time it takes to recoup the cost of an investment. It indicates how long it will take for the project to reach the break-even point and recover the initial costs. In this case, the payback period calculation helps in evaluating the feasibility of accepting the new project for Tangshan Mining Company.

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