Answer:
The payback period for each of the project is - project A = 3.33 and project B = 2.13
Explanation:
First of all the payback period means the amount of time it would take for a company to recover its initial cost or investment which it has invested in the project .
<u>Calculating the payback period for project A</u>
Year Cash flow Cumulative Discounting Present Discounted
cash flow factor value cumulative flow
( NOTE - Formula used for discounting factor = 1 / (1 + i)^n, where i = 16% which is the rate of return on the investment and n is the number of years.)
0 -$343,000 -$343,000 1 -$343,000 -$343,000
1 $52,000 -$291,000 .86206 $44,828 -$298,172
2 $72,000 -$219,000 .74314 $53,508 -$244,665
3 $72,000 -$147,000 .64063 $46,127 -$198,537
4 $447,000 $300,000 .55226 $2,46,874 $48,337
Now we will in which year the cash flow was last negative and then in that we will add ( cumulative cash flow of the year it was last negative / cash flow of the next period ).
= 3 + $147,000 / $447,000
= 3.33 ( payback period for project A )
<u>Calculating the payback period for project B</u>
Year Cash flow Cumulative Discounting Present Discounted
cash flow factor value cash flow
0 -$50,000 -$50,000 1 -$50,000 -$50,000
1 $24,700 -$25,300 .86206 $21,293 -$28,707
2 $22,700 -$2600 .74314 $16,869 - $11,838
3 $20,200 $17,600 . 64063 $12,941 $1013
4 $15,300 $32,900 .55226 $8,450 $9463
Now we will in which year the cash flow was last negative and then in that we will add ( cumulative cash flow of the year it was last negative / cash flow of the next period ).
= 2 + 2600 / 20,200
= 2.13 ( payback period for project B)
