Question

P9-17 Comparing Investment Criteria [LO1, 2, 3, 5, 7] Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$221,117 –$16,136 1 27,200 5,520 2 60,000 8,304 3 60,000 13,962 4 425,000 9,960 Whichever project you choose, if any, you require a 6 percent return on your investment. a. What is the payback period for Project A?

Answer 1

3.17 YEARS

Explanation:

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

Payback period for option A, Product A

Amount invested = –$221,117

Amount recovered in year 1 = –$221,117 + 27,200 = -193,917

Amount recovered in year 2 = -193,917 + 60,000 = -133,917

Amount recovered in year 3 = -133,917 + 60,000 = -73,917

Amount recovered in year 4 = -73,917 + 425,000 = 351,083

Payback period = 3 years + (73,917 / 425,000) = 3.17 years