Question

# You are considering three independent projects, Project A, Project B and Project C. Given the following...

You are considering three independent projects, Project A, Project B and Project C. Given the following cash flow information, calculate the payback period for each.

 Year Project A Project B Project C 0 (Investment) (\$ 900) (\$ 9,000) ( \$7,000) 1 \$ 600 \$ 5,000 \$ 2,000 2 \$ 300 \$ 3,000 \$ 2,000 3 \$ 200 \$ 3,000 \$ 2,000 4 \$ 100 \$ 3,000 \$ 2,000 5 \$ 500 \$ 3,000 \$ 2,000

A:

 Year Cash flows Cumulative Cash flows 0 (900) (900) 1 600 (300) 2 300 0 3 200 200 4 100 300 5 500 800

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2 years

B:

 Year Cash flows Cumulative Cash flows 0 (9000) (9000) 1 5000 (4000) 2 3000 (1000) 3 3000 2000 4 3000 5000 5 3000 8000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(1000/3000)

=2.33 years(Approx).

C:

Payback period=initial investment/annual cash flows

=(7000/2000)

=3.5 years

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