Question

DEF, Inc. is considering the following two mutually exclusive projects with similar risks Year Project A...

DEF, Inc. is considering the following two mutually exclusive projects with similar risks

Year

Project A

Project B

0

– $60,000

– $60,000

1

20,500

18,200

2

15,600

24,400

3

24,400

15,600

4

18,200

20,500

(c) Calculate the payback periods. The target payback period is 2 years. Which project will you choose if you apply the payback period rule?

Homework Answers

Answer #1

Payback period of both the project should be as follows-

Project A is having a initial outflow of 60000.

It is having inflows of cash in first 2 years

=[20500+15600]= 36100

In third year it is receiving, 24400

Payback period= 2+((60,000-36100)/24400)

= 2+.9795

= 2.9795 years.

Payback period of Project B-

Total outflow of the project is 60000.

Cash flows in first 3 years=[18200 + 24400+15600]= 58,200

Payback period= 3+[(60000-58200)/20500]

=3+.087

= 3.087 years.

It is given that the target payback period is 2 years so at least the project would have been provided with the the amount of outflow in 2 years but none of the project had provided the outflow in 2 year so none of the project will be accepted by the company.

None of the projects should be accepted.

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