Question

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.

Answer 1

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.