Buy Coastal, Inc., imposes a payback cutoff of 3 years for its international investment projects. Suppose...

Buy Coastal, Inc., imposes a payback cutoff of 3 years for its international investment projects. Suppose the company has the following two projects available. Project A has payback period of years, while project B has a payback period of years. Therefore, it should project A and project B. (Round your answers to 3 decimal places. (e.g., 32.162))

Year Cash Flow (A) Cash Flow (B)

0 −$43,000 −$59,000

1 21,000 10,000

2 31,000 16,000

3 10,000 26,000

4 2,000 268,000 References

Solutions

Expert Solution

Project A
Year	Cash flow stream	Cumulative cash flow
0	-43000	-43000
1	21000	-22000
2	31000	9000
3	10000	19000
4	2000	21000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-22000))/(9000-(-22000))
1.71 Years
Accept project as payback period is less than 3 years


Project B
Year	Cash flow stream	Cumulative cash flow
0	-59000	-59000
1	10000	-49000
2	16000	-33000
3	26000	-7000
4	268000	261000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-7000))/(261000-(-7000))
3.03 Years
Reject project as payback period is more than 3 years

jeff jeffy answered 8 months ago

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