Michigan Mattress Company Is Considering the Purchase of Land and the Construction

question 5

Multiple Choice

Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0) , has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1) , would cost $500,000. It is estimated that the firm's after-tax cash flow will be increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?

• A) 2 years
• B) 4 years
• C) 6 years
• D) 8 years
• E) 10 years

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