Question

You have the opportunity to invest your savings, $100,000, in either “Project Slow” or “Project Fast”. The cash flows for the two projects are:

Year	Project Fast	Project Slow
1	$35,000	$40,000
2	30,000	35,000
3	30,000	30,000
4	20,000	10,000

If you use the payback method to evaluate your investments, calculate the payback period for each project. Fast: 3.25; Slow: 2.83 Which project would you choose?

Answer:

(a) Project Fast

(b) Project Slow

(c)   

Answer 1

Ans  (b) Project Slow, since it has lower payback period

Year	Cash Flow Project Fast	Cumulative Cash Flow Project Fast	Cash Flow Project Slow	Cumulative Cash Flow Project Slow
0	-100000	-100000	-100000	-100000
1	35,000	-65,000	40,000	-60,000
2	30,000	-35,000	35,000	-25,000
3	30,000	-5,000	30,000	5,000
4	20,000	15,000	10000	15,000
TOTAL	15000		15000
	Project Fast		Project Slow
	Payback Period =	3 YEARS + 5000/20000	Payback Period =	2 YEARS + 25000/30000
		3.25 YEARS		2.83 YEARS