Answer:
Hence, Project X should be selected because it has a payback period of 2 years 9 months which is less that the target payback period of 3 years
Explanation:
The payback period is the estimated length of time in years it takes
the net cash inflow from a project to equate and recoup the the initial cost
Where a project is expected to generate a series of equal annual net cash inflow, the payback period can be calculated as:
Project X
Initial Project Cost= 77,000
At the end of the 2nd year the total amount recouped would have = 28,000 +28000 = 56,000
Hence,
Payback period = 2 years + (77,000-56,000)/28,000× 12 months
= 2 years 9 months
Project Y
At the end of 3rd year the total amount recouped would have
= 2,000 + 25,000 + 25,000 = 52,000
Payback period = 3 years + (55,000-52,000)/20,000 × 12 months
= 3 years , 1.8 months
Decision:
The project with a payback period less than or equal to the target payback period of 3 years should be accepted. Otherwise, it should be rejected.
Hence, Project X should be accepted because it has a payback period of 2 years 9 months which is less that the target payback period of 3 years
