Question

X-treme Vitamin Company is considering two investments, both of which cost $22,000. The cash flows are as follows: Year Project A Project B 1 $ 25,000 $ 22,000 2 12,000 11,000 3 8,000 14,000 Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a-1. Calculate the payback period for Project A and Project B.

Answer 1

Answer:

0.88 year and 1 year

Explanation:

The computation of the payback period for Payback period for Project A and Project B is shown below:

Payback period = Initial investment ÷ Net cash flow

For Project A

Initial investment = $22,000

Year 1 = $25,000

Since the initial investment is less than the annual cash flows so the payback period is

= 0 years + ($22,000 ÷ $25,000)

= 0.88 years

For Project B

Initial investment = $22,000

Year 1 = $22,000

So, the payback period is

= $22,000 ÷ $22,000

= 1 year