Question

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

Answer 1

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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