Question

# 12. Johnson Company has the opportunity to invest in two projects. The cash flow for each...

12. Johnson Company has the opportunity to invest in two projects. The cash flow for each project is as follows.

 Year Cash Flow (A) Cash Flow (B) 0 \$        (50,000.00) \$           (60,000.00) 1 \$           17,000.00 \$              14,000.00 2 \$           22,000.00 \$              15,000.00 3 \$          16,000.00 \$              25,000.00 4 \$           10,000.00 \$           275,000.00

Part 1: Assuming Smith Company has a 3 year payback cut off for investing in projects, based on the payback method, which project/projects should the company choose? Show your work on how you came up with the answer.

Payback period is the time frame in which initial investment gets back in the form of returns.

So, let's calculate payback period for both the projects -

The payback period of project A and B is 2.7 years and 3.02 years. As for project A, payback is less than 3 years(cut-off years), Smith company will select project A.

Please comment, in case you need more help on this. Thank you.