Consider the following two mutually exclusive projects Flow (A) Cash Flow. (B) e

Question

Consider the following two mutually exclusive projects Flow (A) Cash Flow. (B) ear -5340,00051,500 25,000 23,000 20,500 15,600 55,000 75,000 75,000 450,000 2 3 Whichever project you choose, if any, you require a 16 percent return on your investment a-1 What is the payback period for each project? (Round your answers to 2 decimal places. (e.g... 32.16)) Project A Project B years years a-2 If you apply the payback criterion, which investment will you choose? O Project A O Project B b-1 What is the discounted payback period for each project? (Do not round intermediate calculations

Explanation / Answer

1.

based on payback period method we eill choose the project whiuch have the least payback period i.e project b

2. discounted payback period it is similar to above method of payback period but in this instead oif normal csh flow we take discounted cash flow

uncovered cost -= total initial cost of investment - discounted cummulative cost at the year before recovery

pbk = 3yr +(340000-151200.34)/248530

based on above we will choose project B

payback period tells us the time in which we can recover our initial cost of investment             payback period = years before full recovery *           (uncovered cost at start of the year/ cash flow during the year) initial investment = 340000 project A year cash flow cummulative cash flow 1 55000 55000 2 75000 130000 3 75000 205000 4 450000 655000

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