Question

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $ 68,000 $ 60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 If the company is using the payback period method and it requires a payback of three years or less, which project should be selected

Answer 1

The company requires a payback of three years or less, therefore select Project X whose payback is 2.833 years.

Step-by-step explanation:

Payback is the number of years it will take for the company to recover the initial investment.

Project X

Year Cash-flow Balance

0 (68,000) (68,000)

1 24,000 (44,000)

2 24,000 (20,000)

3 24,000 4,000

4 - 4,000

For Project X, at the end of year 2, the company still needs to recover $20,000. At the end of year 3, the project is reflecting a positive cumulative balance, implying that payback was reached some month after year 2.

`Payback = YearsWithNegativeCumulativeCashflowBalance + (-LastNegativeBalance)/(CashInflowfollowingYear)`

`= 2years + (-(-20,000)/(24000)=2.833 years`

Project Y

Year Cash-flow Balance

0 (60,000) (60,000)

1 4,000 (56,000)

2 26,000 (30,000)

3 26,000 (4,000)

4 20,000 16,000

`Payback= 3years + (-(-4,000)/(20000)=3.2 years`

Answer 2

Answer: Company should go for project A.

Explanation: Payback period can be defined as time period taken by a firm from its cash inflows, to recover its initial outflow in that investment. It can be shown as follow :-

`payback\:period=(initial\:outflow)/(cash\:inflows)`

Project X :-