Question

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

Answer 1

Answer:

Samuelson Electronics should accept Project A because according to the payback decision rule, the project with the shortest payback period should always be chosen over the project with the longer payback period, since a longer payback period means more risk.