Question

Use the following information to answer the following question.

Below are the expected

afterminus−tax

cash flows for Projects Y and Z. Both projects have an initial cash outlay of​ $20,000 and a required rate of return of​ 17%.

Project Y Project Z

Year 1​ $12,000 $10,000

Year 2​ $8,000 $10,000

Year 3​ $6,000 0

Year 4​ $2,000 0

Year 5​ $2,000 0

Payback for Project Y is

Answer 1

Payback period represents the time period in which the initial investment in the project is recovered.

Payback period of project Y is computed as follows:

As can be seen $ 20,000 of investment is recovered in exactly two years of cash flows i.e.

= $ 12,000 + $ 8,000

= $ 20,000

So, the payback period of project Y is 2 years

Payback period of project Z is computed as follows:

As can be seen $ 20,000 of investment is recovered in exactly two years of cash flows i.e.

= $ 10,000 + $ 10,000

= $ 20,000

So, the payback period of project Z is 2 years

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