Question

Elysian​ Fields, Inc., uses a maximum payback period of 6 years and currently must choose between...

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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