Question

1-A company is considering mutually exclusive Projects A and B, which have the following cash flows; which project should be selected if the company is using the payback method? Year Project A Cash Flow Project B Cash Flow 0 -$200 -$300 1 40 90 2 60 70 3 70 120 4 80 150 5 100 1 40.

Answer 1

Ans.	A project is accepted with lower payback period because this indicates that the
	company will recover its invested money in less time period.
	So, the Project B should be accepted.
	*CALCULATIONS:
PROJECT   A :	Year	Cash inflows	Cummulative Cash Inflows
	1	$40	$40
	2	$60	$100
	3	$70	$170
	4	$80	$250
	5	$100	$350
	Full years + (Amount to complete recovery in next year / Projected cash inflow in next year) = Payback period
		3 + ($30 / $80)
		3 + 0.375
		3.375    years
	*Explanations:
	*Full years consist of the years in which the Sum of cash inflows are the nearest lower value than investment.
	*Cummulative Cash Inflows = Cash inflow of current year + Sum of previous year cash inflows
	*Amount to complete recovery in next year = Investment - Cummulative cash flow of full years
		$200 - $170
		$30
PROJECT   B :	Year	Cash inflows	Cummulative Cash Inflows
	1	$90	$90
	2	$70	$160
	3	$120	$280
	4	$150	$430
	5	$140	$570
	Full years + (Amount to complete recovery in next year / Projected cash inflow in next year) = Payback period
		3 + ($20 / $150)
		3 + 0.133
		3.133    years
	*Explanations:
	*Full years consist of the years in which the Sum of cash inflows are the nearest lower value than investment.
	*Cummulative Cash Inflows = Cash inflow of current year + Sum of previous year cash inflows
	*Amount to complete recovery in next year = Investment - Cummulative cash flow of full years
		$300 - $280
		$20