Question

Your company is considering three independent projects. Given the following cash flow information, calculate the payback period for each. If your company requires a three-year payback before an investment can be accepted, which project(s) would be accepted?

Project D Project E Project F

Cost 205,000.00 179,000.00 110,000.00

Inflow year 1 53,000.00 51,000.00 25,000.00

Inflow year 2 50,000.00 87,000.00 55,000.00

Inflow year 3 48,000.00 41,000.00 21,000.00

Inflow year 4 30,000.00 52,000.00 9,000.00

Inflow year 5 24,000.00 40,000.00 35,000.00

Payback Period EXACT 5 YEARS EXACT 3 YEARS EXACT 4 YEARS PROJECT E

Refer to the Solved Example 9.1 on pg. 259 of your text...THE BELOW IS JUST AN EXAMPLE FROM THE BOOK OF HOW THE QUESTION NEEDS TO BE ANSWERED.

shows the calculations of the present value of each of the future cash flows discounted at 6%. We can now determine how long it will take to recover the initial investment for the two copy machines in current dollars.

For Copier A,

Year 1: ? $5,000.00 + $2,358.49 = ? $2,641.51 remaining cost to recover Year 2: ? $2,641.51 + $2,224.99 = ? $416.52 remaining cost to recover Year 3: ? $416.52 + $2,099.05 = $1,682.53; the cost is fully recovered by the end of year 3.

For Copier B,

Year 1: ? $5,000.00 + $1,415.09 = ? $3,584.91 remaining cost to recover Year 2: ? $3,584.91 + $2,224.99 = ? $1,359.92 remaining cost to recover Year 3: ? $1,359.92 + $2,938.67 = $1,578.75; the cost is fully recovered by the end of year 3.

Calculations Year 1 Year 2 Year 3 Year 4 Year 5 (THESE NEED TO BE SHOWN IN EXCEL) HOW THE ANSWER WAS OBTAINED

Formulas Year 1 Year 2 Year 3 Year 4 Year 5 (THESE NEED TO BE SHOWN IN EXCEL) THE FORMULAS USED TO GET THE ANSWER

Answer 1

Since the question mentions paback period,I am assuming here you need the payback period for projects D, E and F. The example from book shows DISCOUNTED payback period. Also you need the discount rate to claculate the discounted payback period. Since these projects miss the discount rate, i will be calculating the payback period. If you need the discounted payback period, please leave comment with the discount rate.

Project D:

Cumulative cash flow for year 0 = -205,000

Cumulative cash flow for year 1 = -205,000 + 53,000 = -152,000

Cumulative cash flow for year 2 =  -152,000 + 50,000 = -102,000

Cumulative cash flow for year 3 = -102,000 + 48000 = -54,000

Cumulative cash flow for year 4 =  -54,000 + 30000 = -24,000

Cumulative cash flow for year 5 = -24,000 + 24,000 = 0

Payback period for project D = 5 years

Project E:

Cumulative cash flow for year 0 = -179,000

Cumulative cash flow for year 1 = -179,000 + 51,000 = -128,000

Cumulative cash flow for year 2 =  -128,000 + 87,000 = -41,000

Cumulative cash flow for year 3 = -41,000 + 41000 = 0

Payback period for project E = 3 years

Project F:

Cumulative cash flow for year 0 = -110,000

Cumulative cash flow for year 1 = -110,000 + 25,000 = -85,000

Cumulative cash flow for year 2 =  -85,000 + 55,000= -30,000

Cumulative cash flow for year 3 = -30,000 + 21000 = -9,000

Cumulative cash flow for year 4 = -9,000 + 9000 = 0

Payback period for project F = 4 years

Comapny should accept project E