Question

Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $ 77,000 $ 55,000 Net cash flow: Year 1 28,000 2,000 Year 2 28,000 25,000 Year 3 28,000 25,000 Year 4 0 20,000 If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Answer 1

Answer: Project X

Step-by-step explanation:

Payback period is a method of capital budgeting that judges a project's viability based on when it will be able to pay back the initial investment.

Payback period Project X

Cost of machines is $77,000

= Year 1 + Year 2 + Year 3

= 28,000 + 28,000 + 28,000

= $84,000

Means it paid back within 3 years.

= Year + Year 2

= 28,000 + 28,000

= $56,000

At year 2 how much was left;

= 77,000 - 56,000

= 21,000

= Amount left/ amount paid in year

= 21,000/28,000

= 0.75

= 2 years + 0.75 years

It took 2.75 years to pay off the Project X

Payback period Project Y

Cost of machines is $55,000

= Year 1 + Year 2 + Year 3

= 2,000 + 25,000 + 25,000

= $52,000

Means it did not payback within 3 years.

In 4th year

= 55,000 - 52,000

= $3,000

= 3,000/20,000

= 0.15

It took 3 years + 0.15 year = 3.15 years to pay off.

Project X should be selected as it pays back within 3 years.