Question

​(Payback and discounted payback period​ calculations)  The​ Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots throughout the Midwest. ​ Bar-None's management is considering three investment projects for next year but​ doesn't want to make any investment that requires more than three years to recover the​ firm's initial investment. The cash flows for the three projects​ (Project A, Project​ B, and Project​ C) are as​ follows: 

Year

Year   Project A   Project B   Project C
0   $(980)   $(9,000)   $(5,500)
1   $700   $5,500   $1,500
2   $400   $2,000   $1,500
3   $170   $2,000   $2,500
4   $60   $2,000   $2,500
5   $430   $2,000   $2,500

a.  Given​ Bar-None's three-year payback​ period, which of the projects will qualify for​ acceptance?

b.  Rank the three projects using their payback period. Which project looks the best using this​ criterion? Do you agree with this​ ranking? Why or why​ not?

c.  If​ Bar-None uses a discount rate of 9.4 percent to analyze​ projects, what is the discounted payback period for each of the three​ projects? If the firm still maintains its​ three-year payback policy for the discounted​ payback, which projects should the firm​ undertake?

Answer 1

A) payback period means which how much time we can able to recover the intial investment

I) project A

Year Amount cumulative cash flows

0. ($980). $(980)

1. $700. $(280)

2. $400. $120

So project A recovering the intial investment by during the 2 ND year

II) if you follow the above procedure then project B will recover the intial investment during the 3rd year

III) if you follow the above procedure for project C will recover the intial investment by end of 3 Rd year

B)project A - during 2 ND year - rank 1

Project B - during the 3 Rd year - rank 2

Project C - end of 3 Rd year - rank 3

Yes,but we can't decide the project based on payback period most appropriate method is NPV

C) based on discounted payback period

Project A = $700*0.914+$2000*.835+$2000*0.763=$1103.51-$980=$123.5

Project B= $5500*.914+$2000*.835+$2000*0.763=$8223-9000=$(777)

Project c = $1500*.914+$1500*0 835+$2500*.763=$4531-5500=$(969)

Hence select project a based on discounted payback

paybacke method