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**

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ch 12
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