Question

 Shell Camping​ Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of ​$140,000. John​ Shell, president of the​ company, has set a maximum payback period of 4 years. The​ after-tax cash inflows associated with each project are shown in the following​ table:
1 20,000 50,000
2 30,000 40,000
3 40,000 30,000
4 50,000 20,000
5 30,000 30,000

a.  Determine the payback period of each project.

b.  Because they are mutually​ exclusive, Shell must choose one. Which should the company invest​ in?

Answer 1

Payback Period of First Project = 1(20,000) + 1(30,000) + 1(40,000) + 1(50,000)

Payback Period of First Project = 4 years

Payback Period of Second Project = 1(50,000) + 1(40,000) + 1(30,000) + 1(20,000)

Payback Period of Second Project = 4 years

b.

Shell shoud choose second Project as in this, higher cash flows are earlier in the project life, so NPV will be higher for this project, else cash flows of both projects are equal and payback period is also equal