Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $26,000; project Helium requires an initial outlay of $33,000. Using the expected cash inflows given for each project in the following table, calculate each project's payback period. Which project meets Elysian's standards?
1 $5,500 $7,500
2 $5,000 $7,500
3 $7,500 $7,000
4 $4,000 $4,500
5 $3,500 $5,500
6 $2,000 $4,500
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Answer:
Payback period for Hydrogen
After year 5 the net CF becomes positive
=> Payback period = 5 + 500/2000 = 5.25 years
Payback period for Helium
After year 5 the net CF becomes positive
Payback period = 5 + 1000/4500 = 5.22 years
Since, both projects have payback < 6 years, both the projects are acceptable
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