Chapter 8-Question 3) Calculating Payback. Offshore Drilling Products, Inc., imp
ID: 2669318 • Letter: C
Question
Chapter 8-Question 3) Calculating Payback. Offshore Drilling Products, Inc., imposes a payback cutoff of three years for its international projects. If the company has the following two projects available, should it accept either of them?
Year Cash Flow (A) Cash Flow (B)
0 -$45,000 -$90,000
1 17,000 19,000
2 23,000 24,000
3 19,000 35,000
4 5,000 250,000
Explanation / Answer
Payback period = No. of years prior to full recovery + (unrecovered cost @ start of year of full recovery / Cash flow during year of full recovery). Using the above formula: Payback period for project A is 2.26 years Payback period for project B is 3.04 years Hence the company should accept project A as it meets its payback requirements.