Question

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 11 percent.

  

Year	AZM Mini-SUV			AZF Full-SUV
0	–$	520,000		–$	870,000
1		334,000			364,000
2		208,000			448,000
3		164,000			304,000

  

a.	What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

Answer 1

AZM Mini-SUV

Payback period= full years until recovery + unrecovered cost at the start of the year/ cash flow during the year

= 1 year + ($520,000 - $334,000)/ $208,000

= 1 year + $186,000/ $208,000

= 1 year + 0.89

= 1.89 years.

AZF Full-SUV

Cumulative cash flow in year 1= $364,000

Cumulative cash flow in year 2= $812,000

Payback period= full years until recovery + unrecovered cost at the start of the year/ cash flow during the year

= 2 years + ($870,000 - $812,000)/ $304,000

= 2 years + $58,000/ $304,000

= 2 years + 0.19

= 2.19 years.

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