Final answer:
The question involves calculating the payback period for potential international investment projects at Stenson, Inc., and determining the simple payback time for an energy-saving insulation investment. This requires summing cash flows to see when the initial investment is recouped.
Step-by-step explanation:
When a company like Stenson, Inc. considers international investment projects, it assesses the payback period, which is the time needed for the initial investment to be recouped through the cash flows the project generates. The company has set a cutoff point of three years, meaning any project that takes longer than that is likely to be rejected. To determine whether a project meets this criterion, we must sum the cash flows year by year until the initial outlay is recovered.
For example, looking at cash flows for Project A starting with a negative cash flow at Year 0 (initial investment) and adding the positive cash flows in the subsequent years, we see when the cumulative cash flow becomes positive. If this happens within the three-year cutoff, Project A is accepted. Similarly, Project B's cash flows are examined to check if it falls within the accepted payback period.
Furthermore, when considering the simple payback time for an investment such as installing insulation, we would calculate the annual savings in energy costs, then divide the cost of insulation by that annual savings to determine the number of years it will take for the savings to cover the initial investment.