Problem 8-3 Calculating Payback [LO 1 ] Global Toys, Inc., imposes a payback cut
ID: 2735552 • Letter: P
Question
Problem 8-3 Calculating Payback [LO 1
] Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available. Year Cash Flow A Cash Flow B
0 –$ 50,000 –$ 95,000
1 19,500 21,500
2 26,000 26,500
3 21,500 32,500
4 7,500 245,000
Requirement 1: What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Payback period
Project A ___________ years
Project B ____________ years
Should it accept either of them?
Requirement 2:Should it accept either of them?
Accept project A and reject project BAccept both projects A and B
Reject both projects A and B
Accept project B and reject project A
Explanation / Answer
Year
Project A
Project B
Cash flow
Cumulative cash flows
Cash flow
Cumulative cash flows
1
$ 19,500.00
$ 19,500.00
$ 21,500.00
$ 21,500.00
2
$ 26,000.00
$ 45,500.00
$ 26,500.00
$ 48,000.00
3
$ 21,500.00
$ 67,000.00
$ 32,500.00
$ 80,500.00
4
$ 7,500.00
$ 74,500.00
$ 245,000.00
$ 325,500.00
Requirement 1:
Payback period for Project A = 2 years + ($50,000-$45,500)/$21,500 = 2.21 years
Payback period for Project B = 3 years + ($95,000-$80,500)/$245,000 = 3.06 years
Requirement 2:
Accept Project A and reject Project B because project A has shorter payback period.
Year
Project A
Project B
Cash flow
Cumulative cash flows
Cash flow
Cumulative cash flows
1
$ 19,500.00
$ 19,500.00
$ 21,500.00
$ 21,500.00
2
$ 26,000.00
$ 45,500.00
$ 26,500.00
$ 48,000.00
3
$ 21,500.00
$ 67,000.00
$ 32,500.00
$ 80,500.00
4
$ 7,500.00
$ 74,500.00
$ 245,000.00
$ 325,500.00