Question

Your company accepts projects with a two year or less payback period. What should you do based on the following information?

Cash Flow Period 0 1 2 3

project A -$78,000 $30,000 $48,000 $14,000

project B -$74,000 $12,000 $16,000 $75,000

Extend the payback period for project A since it has a higher initial cost, which would make.

a. Accept project A and reject project B.

b. Reject both project A and project B.

c. Accept project B and reject project A.

d. Accept both project A and project B.

Answer 1

d. Accept both project A and project B.
Explanation: As project A has 2 years payback period and project B
have 2.61 years payback period but there is mention that extend the
the payback period for project A since it has a higher initial cost, so
if we extend the payback period, still accept both projects
Project A
Year	Cash Inflow (Outflow)	Cumulative Net Cash Inflow (Outflow)
0	(78,000)	(78,000)
1	30,000	(48,000)
2	48,000	-
3	14,000	14,000
Payback period		2	Years
Project B
Year	Cash Inflow (Outflow)	Cumulative Net Cash Inflow (Outflow)
0	(74,000)	(74,000)
1	12,000	(62,000)
2	16,000	(46,000)
3	75,000	29,000
Payback period		2.61	Years
(2 + 46,000/75000)