Question
In: Finance
Suzanne's Cleaners is considering two projects with the following cash flow data. Based on payback periods,...
-
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
Solutions
Expert Solution
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.
jeff jeffy answered 1 year agoRelated Solutions
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Cost 205,000.00 179,000.00 110,000.00
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Inflow year 2 50,000.00 87,000.00 55,000.00
Inflow year 3 48,000.00 41,000.00 21,000.00
Inflow year 4 30,000.00 52,000.00 9,000.00
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Year
Investment A
Investment B
0
-$100
-$100
1
58
31
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73
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87
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Question options:
1-
Project A 1.58 years; Project B 2.53 years
2-
Project A 1.46 years; Project B 2.21 years
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