Question

Atlantis Inc. is considering two mutually exclusive projects with the following cash flows: Year 0 1 2 3 4 Project A ($120,000) $60,000 $40,000 $60,000 $80,000 Project B ($100,000) $60,000 $50,000 $0 $0 If Atlantis accepts projects that pay back in two years or less, which should be undertaken?

Answer 1

Answer:

Project b

Explanation:

The cash payback period calculates how long the amount invested in a project would be recouped from its cummulative cash flows.

Project b should be taken because the amount invested would be recouped in 1.8 years which is less than the 2 years benchmark.

The amount invested in project A would be gotten back in 2.3 years which is greater than the 2 years benchmark. This makes project A unacceptable.

Please find explanations on how this answer was derived in the attached images.

I hope my answer helps you