Question

24. The company is considering two independent projects with an initial cost of $18,000 each. The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively. The required return is 12 percent and the cutoff discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted

Answer 1

Answer: Project B

Step-by-step explanation:

To find out the project that should be accepted based on the discount rate and the cut-off discounted payback periods, find the present value of the three year cashflows of each project. If it is larger than the initial investment then it should be accepted:

Project A

= 3,000 / (1 + 12%) + 7,000 / (1 + 10%)² + 10,000 / (1 + 12%)³

= $15,376.73

Project A's present value is less than the initial investment of $18,000 so it should not be chosen.

Project B

= 3,000 / (1 + 12%) + 7,000 / (1 + 10%)² + 15,000 / (1 + 12%)³

= $18,935.63

Project B's present value is larger than the initial investment of $18,000 so it should be chosen.