Question

1. Suzanne's Cleaners is considering two projects with the following cash flow data. Based on payback periods, which project is less risky based on liquidity risk?

   PROJECT 1

   Year	0	1	2	3	4	5
   Cash flows	-$1,100	$300	$310	$320	$330	$340

   PROJECT 2

   Year	0	1	2	3	4	5
   Cash flows	-$850	$100	$75	$500	$200	$275

   	A.	Project 1
   	B.	Project 2

Answer 1

a.Project 1

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 3 years + 170/ 330

                              = 3 years + 0.52

                              = 3.52 years.        

b.Project 2

Payback period= 3 years + 175/ 200

                              = 3 years + 0.88

                              = 3.8 years.

Project 1 is less risky based on liquidity risk since it has the shorter payback period.

In case of any query, kindly comment on the solution.