Question

	PROJECT A		PROJECT B		PROJECT C		Copy to Clipboard + Open in Excel +
Initial Outlay	−​$950		−​$11,000		−​$5,500
Inflow year 1	500		6,000		1,000
Inflow year 2	200		3,000		1,000
Inflow year 3	300		3,000		4,000
Inflow year 4	100		3,000		4,000
Inflow year 5	400		3,000		4,000

payback period

calculations​)

You are considering three independent​ projects: project​ A, project​ B, and project C. Given the cash flow information in the window

​, calculate the payback period for each. If you require a​ 3-year payback before an investment can be​ accepted, which​ project(s) would be​ accepted?

What is the payback period of project​ A?

nothing

years  ​(Round to two decimal​ places.)If you require a​ 3-year payback before an investment can be​ accepted, you should

▼

reject

accept

project A because its payback period is

▼

less than or equal to

greater than

the maximum acceptable payback period.  ​(Select from the​ drop-down menus.)

What is the payback period of project​ B?

nothing

years  ​(Round to two decimal​ places.)If you require a​ 3-year payback before an investment can be​ accepted, you should

▼

accept

reject

project B because its payback period is

▼

less than or equal to

greater than

the maximum acceptable payback period.  ​(Select from the​ drop-down menus.)

What is the payback period of project​ C?

nothing

years  ​(Round to two decimal​ places.)If you require a​ 3-year payback before an investment can be​ accepted, you should

▼

accept

reject

project C because its payback period is

▼

less than or equal to

greater than

the maximum acceptable payback period.  ​(Select from the​ drop-down menus.)

Answer 1

Payback Period for PROJECT-A

Year	Cash Flows	Cumulative net Cash flow
0	-950	-950
1	500	-450
2	200	-250
3	300	50
4	100	150
5	400	550

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2 Year + ($250 / $300)

= 2 Year + 0.83 Years

= 2.83 Years

You should accept PROJECT-A, because it’s payback period is less than the maximum acceptable payback period.

Payback Period for PROJECT-B

Year	Cash Flows	Cumulative net Cash flow
0	-11,000	-11,000
1	6,000	-5,000
2	3,000	-2,000
3	3,000	1,000
4	3,000	4,000
5	3,000	7,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2 Year + ($2,000 / $3,000)

= 2 Year + 0.67 Years

= 2.67 Years

You should accept PROJECT-B, because it’s payback period is less than the maximum acceptable payback period.

Payback Period for PROJECT-C

Year	Cash Flows	Cumulative net Cash flow
0	-5,500	-5,500
1	1,000	-4,500
2	1,000	-3,500
3	4,000	500
4	4,000	4,500
5	4,000	8,500

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2 Year + ($3,500 / $4,000)

= 2 Year + 0.80 Years

= 2.80 Years

You should accept PROJECT-C, because it’s payback period is less than the maximum acceptable payback period.