Answer: Project X
Explanation:
Payback period is a method of capital budgeting that judges a project's viability based on when it will be able to pay back the initial investment.
Payback period Project X
Cost of machines is $77,000
= Year 1 + Year 2 + Year 3
= 28,000 + 28,000 + 28,000
= $84,000
Means it paid back within 3 years.
= Year + Year 2
= 28,000 + 28,000
= $56,000
At year 2 how much was left;
= 77,000 - 56,000
= 21,000
= Amount left/ amount paid in year
= 21,000/28,000
= 0.75
= 2 years + 0.75 years
It took 2.75 years to pay off the Project X
Payback period Project Y
Cost of machines is $55,000
= Year 1 + Year 2 + Year 3
= 2,000 + 25,000 + 25,000
= $52,000
Means it did not payback within 3 years.
In 4th year
= 55,000 - 52,000
= $3,000
= 3,000/20,000
= 0.15
It took 3 years + 0.15 year = 3.15 years to pay off.
Project X should be selected as it pays back within 3 years.
