Question

Use the following information to answer the following question. Below are the expected after minus −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 Year 1​ $12,000, Year 2​ $8,000, Year 3​ $6,000 Year 4​ $2,000 5​ $2,000

Project Z year 1 $10,000, year 2 $10,000 year 3 - 0 year 4 - 0 year 5 - 0.

A. four years.

B. two years.

C. one year.

D. three years.

choose one

Answer 1

It is not mentioned in the question that what is the requirement but looking at the options ,it is clear that question wants to ask payback period

Payback period is the time required to recover initial investment .

For project Y ,Initial outlay is 20000 and cummulative cash flows in year 1 and 2 is 20000. Therefore payback period is 2 years

And similarly for project Z ,initial investment is 20000 and cumulative cash inflows in year 1 and 2 is 20000

Hence payback period of project Z is also 2 years

Hence correct answer is option (B) two years