Funky Beats manufactures high-quality headphones for music lovers of all styles. The company requires a payback period

Question:

Funky Beats manufactures high-quality headphones for music lovers of all styles. The company requires a payback period of less than five years for any capital budgeting decisions.

Relevant Cash Flows at End of Each Year Today 2 3 4 Initial investment (132,000) 40,000 Annual cash flows from operation

1. Does the project meet the requirements?

2. Is the investment profitable? Hint: Calculate NPV.

3. Could you know the amount of tax shield lost on disposal without doing any calculations? Why should the payback period not be the sole basis for a capital budgeting decision?

Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...

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