Question

Siva, Inc., imposes a payback cutoff of three years for its international investment projects. Year Cash Flow (A) Cash Flow (B) 0 –$ 70,000 –$ 80,000 1 28,000 20,000 2 38,000 23,000 3 26,000 36,000 4 13,000 240,000 What is the payback period for both projects? (Round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The payback period for Silva Inc. is 3 years. If considering only this method of evaluating projects, Silva Inc will invest in project A and dismiss project B.  

Payback period A=2,1539 years.

Payback period B= 3,0042 years

Explanation:

The payback period refers to the amount of time it takes to recover the cost of an investment. The payback period is the length of time an investment reaches a breakeven point.

Cash Flow A:

                $

I0= - 70.000

1=     28000 =    -42000

2=    38000 =    -4000

3=     26000 =    22000

Payback period= full years until recovery +

                             unrecovered cost beginning year/Cashflow  during year

Payback period A= 2  + (4000/26000)= 2,1539 years.

Cash Flow B:

                $

I0=   -80000

1=       20000 =   -60000

2=       23000 =   -37000

3=       36000 =    -1000

4=       240000 =   239000

Payback period B= 3 + 1000/240000= 3,0042 years

The payback period for Silva Inc. is 3 years. If considering only this method of evaluating projects, Silva Inc will invest in project A and dismiss project B.