Question

Calculating Payback. Tulip Mania, Inc., imposes a payback cutoff of 3 years for its international investment projects. They are currently evaluating the following two projects:

1. Using the following table please find the payback period for project A, and for project B

2. What project should Tulip Mania accept.

3. Please show and explain the work using a finnancial calculator.

Year	Cashflow (A)	Cashflow (B)
0	-70000	-100000
1	48000	10000
2	25000	25000
3	15000	40000
4	5000	100000

Answer 1

Payback period is the period in whihc initial investment is recovered.

Payback period :

Machine A:

Payback period = Year in which least +ve Closing bal + [ CLsoing bal at that year / Amount recovered in next year ]

= 1 + [ 22000 / 25000 ]

= 1 + 0.88

= 1.88 Years

Machine A:

Payback period = Year in which least +ve Closing bal + [ CLsoing bal at that year / Amount recovered in next year ]

= 3 + [ 25000 / 100000 ]

= 3 + 0.25

= 3.25 Years

B)

Required Payback period - 3 Years

select the project with Payback period < 3 Years i.e Project A.