MC Question 26
The following information relates to an investment project which is being evaluated by the directors of Fence Co, a listed company. The initial investment, payable at the start of the first year of operation, is $3·9 million.
| Year | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Net operating cash flow ($000) | 1,200 | 1,500 | 1,600 | 1,580 |
| Scrap value ($000) | 100 |
The directors believe that this investment project will increase shareholder wealth if it achieves a return on capital employed greater than 15%. As a matter of policy, the directors require all investment projects to be evaluated using both the payback and return on capital employed methods. Shareholders have recently criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using the academically-preferred net present value method.
The directors have a remuneration package which includes a financial reward for achieving an annual return on capital employed greater than 15%. The remuneration package does not include a share option scheme.
What is the payback period of the investment project?
A. 2·75 years
B. 1·50 years
C. 2·65 years
D. 1·55 years