Question

# Offshore Drilling Products, Inc., imposes a payback cutoff of three years for its international investment projects....

 Offshore Drilling Products, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.
 Year Cash Flow A Cash Flow B 0 –\$ 49,000 –\$ 94,000 1 19,000 21,000 2 25,400 26,000 3 21,000 33,000 4 7,000 246,000
 Requirement 1: What is the payback period for each project? (Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
 Payback period Project A _______________years Project B ________________years

Project A:

Cumulative cash flow for year 0 = -49,000

Cumulative cash flow for year 1 = -49,000 + 19,000 = -30,000

Cumulative cash flow for year 2 = -30,000 + 25,400 = -4,600

cumulative cash flow for year 3 = -4,600 + 21,000 = 16,400

4,600 / 21,000 = 0.219

Payback period = 2 + 0.219 = 2.22 years

Project B:

Cumulative cash flow for year 0 = -94,000

Cumulative cash flow for year 1 = -94,000 + 21,000 = -73,000

Cumulative cash flow for year 2 = -73,000 + 26,000 = -47,000

cumulative cash flow for year 3 = -47,000 + 33,000 = -14,000

cumulative cash flow for year 4 = -14,000 + 246,000 = 232,000

14,000 / 246,000 = 0.0569

Payback period = 3 + 0.0569 = 3.06 years

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