Question

Two projects are presented to the project selection committee. Project A will cost $250,000 to implement and is expected to have annual net cash flows of $75,000. Project B will cost $150,000 to implement and should generate annual net cash flows of $52,000. Using the payback period method which project is better? Show your work or no credit will be given.

Answer 1

Answer: Project B at 2.88 years

Step-by-step explanation:

The Payback period analyses the viability of a project by measuring how long it will take to pay back the initial outlay.

In the case of a constant inflow, it can be calculated by simply dividing the initial outlay by the constant inflow to find out how long it will take to reach that Outflow.

Project A will cost $250,000 and bring in $75,000 a year.

= 250,000/75,000

= 3.33 years

Project B will cost $150,000 and bring in 52,000 a year.

= 150,000/52,000

= 2.88 years

Project B takes the shorter time to repay it's initial cost/outlay so it is the better project out of the 2.