Question

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 –$ 48,000 –$ 93,000 1 18,500 20,500 2 24,800 25,500 3 20,500 33,500 4 6,500 247,000 What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Payback period Project A years Project B years Which, if either, project(s) should the company accept?

Answer 1

Answer:

2.23 years ; 3.05 years ; Project A

Explanation:

The computation of the payback period for each project is as follows

For project A

In year 0 = $48,000

In year 1 = $18,500

In year 2 = $24,800

In year 3 = $20,500

In year 4 = $6,500

If we sum the first 2 year cash inflows than it would be $43,300

Now we subtract the $44,800 from the $48,000 , so the amount would be $4,700 as if we added the third year cash inflow so the total amount exceed to the initial investment. Hence, we deduct it

And, the next year cash inflow is $20,500

So, the payback period equal to

= 2 years + $4,700 ÷ $20,500

= 2.23 years

For project B

In year 0 = $93,000

In year 1 = $20,500

In year 2 = $25,500

In year 3 = $33,500

In year 4 = $247,000

If we sum the first 3 year cash inflows than it would be $79,500

Now we subtract the $44,800 from the $48,000 , so the amount is$13,500 as if we added the third year cash inflow so the total amount exceed to the initial investment. Therefore, we deduct it

And, the next year cash inflow is $247,000

So, the payback period equal to

= 3 years + $13,500 ÷ $247,000

= 3.05 years

As we can see that the project A has less payback period so the same is to be selected