Question

Bronco, Inc., imposes a payback cutoff of three years for its international investment projects.

  

Year	Cash Flow (A)				Cash Flow (B)
0	–$	54,000			–$	64,000
1		20,000				12,000
2		22,000				15,000
3		18,000				20,000
4		5,000				224,000

  

What is the payback period for both projects? (Round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Payback Period - PROJECT A

Year	Cash Flows	Cumulative net Cash flow
0	-54,000	-54,000
1	20,000	-34,000
2	22,000	-12,000
3	18,000	6,000
4	5,000	11,000

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

= 2 Year + ($12,000 / $18,000)

= 2 Year + 0.67 years

= 2.67 Years

“Payback Period - PROJECT A = 2.67 Years”

Payback Period - PROJECT B

Year	Cash Flows	Cumulative net Cash flow
0	-64,000	-64,000
1	12,000	-52,000
2	15,000	-37,000
3	20,000	-17,000
4	2,24,000	2,07,000

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

= 3 Year + ($17,000 / $224,000)

= 3 Year + 0.08 years

= 3.08 Years

“Payback Period - PROJECT B = 3.08 Years”