Question

Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.

Year	Cash Flow A		Cash Flow B
0	–$	48,000	–$	93,000
1		18,500		20,500
2		24,800		25,500
3		20,500		33,500
4		6,500		247,000

What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	Payback period
Project A	years
Project B	years

Answer 1

A:

Year	Cash flows	Cumulative Cash flows
0	(48000)	(48000)
1	18500	(29500)
2	24800	(4700)
3	20500	15800
4	6500	22300

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

2+(4700/20500)=2.23 years(Approx).

B:

Year	Cash flows	Cumulative Cash flows
0	(93000)	(93000)
1	20500	(72500)
2	25500	(47000)
3	33500	(13500)
4	247000	233500

Payback=3+(13500/247000)

=3.05 years(Approx).