Question

Which of the following statements is false?
(a) If the payback period is less than the maximum acceptable payback period, accept the project.
(b) If the payback period is greater than the maximum acceptable payback period, reject the project.
(c) If the payback period is less than the maximum acceptable payback period, reject the project
(d) Two of the above.

What is the payback period for TangAsha company’s new project if its initial after tax cost is P10,000,000 and it is expected to provide after-tax operating cash inflows of P3,600,000 in year 1, P2,800,000 in year 2, P1.400,000 in year 3 and P3,600,000 in year 4?
(a) 4.33 years.
(b) 3.33 years.
(c) 2.33 years.
(d) None of the above.

REFER TO NO. 16 Should TangAsha company accept a new project if its maximum payback is 3.5 years

(a) Yes.
(b) No.
(c) It depends.
(d) None of the above.

Answer 1

The correct option is:

(a) If the payback period is less than the maximum acceptable payback period, accept the project.

Payback is the time within which , a project's initail investment , is recouped or recovered , by the cash-inflows of the project. So, the earlier, the better.So, we recommend the projects that take as less time as possible, among the competing projects , as compared to the maximum time limit (usually in years), set by us.

The cashflows used can be either discounted or undiscounted , as the management may choose.

TangAsha       Company
Year	CFs	Cumulative CFs
0	-10000000	-10000000
1	3600000	-6400000
2	2800000	-3600000
3	1400000	-2200000
4	3600000	1400000

So, Payback period=Year corresponding to the last negative cumulative cashflow+(Absolute value of that last negative cumul.CF/Total CFs in the next yr.)

ie.3+(2200000/3600000)=

3.61

Years

So, the answer is:

d. None of the above

NO. Should not accept the new project as its P/B period is more than the maximum allowed/set.

as 3.61 > 3.5 years