Question

Anna is considering two projects, both of which have an initial cost of $12,000 and total cash inflows of $15,000. The cash inflows of project A are $1,000, $2,000, $4,000, and $8,000 over the next four years, respectively. The cash inflows for project B are $8,000, $4,000, $2,000 and $1,000 over the next four years, respectively. Which one of the following statements is correct if Anna requires a 10 % rate of return and has a required discounted payback period of 3 years? Given this information, Anna should accept project A because it has a payback period of 2.65 years.

TRUE OR FALSE?

Answer 1

The discounted cashflows at 10% are given below for project A and B are

Project A unable to retain the initial investment of $12000 in four years which equal to $11,031.35

Project B receives $10,578.51 in two years and will receive the remanining amount of $1421.49 ($12000-$10578.51) in 3rd year

In 3rd year=$1421.49/$1502.63=0.95

The total discounted payback period=2.95 years

False

Project B has discounted payback period of less than 3 years and Project A has more than 4 years