Question

Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available. Year Cash Flow A Cash Flow B 0 –$ 51,000 –$ 96,000 1 20,000 22,000 2 26,600 27,000 3 22,000 32,000 4 8,000 244,000 Requirement 1: What is the payback period for each project?

Answer 1

Project A = 2.2 yeas

Project B = 3.06 years

Step-by-step explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

For Project A:

In year 0 = $51,000

In year 1 = $20,000

In year 2 = $26,600

In year 3 = $22,000

In year 4 = $8,000

If we sum the first 2 year cash inflows than it would be $46,600

Now we deduct the $46,600 from the $51,000, so the amount would be $4,400 as if we added the third year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $22,000

So, the payback period equal to

= 2 years + $4,400 ÷ $22,000

= 2.2 yeas

In 2.2 yeas, the invested amount is recovered for project A

For Project B:

In year 0 = $96,000

In year 1 = $22,000

In year 2 = $27,000

In year 3 = $32,000

In year 4 = $244,000

If we sum the first 3 year cash inflows than it would be $81,000

Now we deduct the $71,000 from the $96,000, so the amount would be $15,000 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $244,000

So, the payback period equal to

= 3 years + $15,000 ÷ $244,000

= 3.06 yeas

In 3.06 yeas, the invested amount is recovered for project B