Answer:
2.23 years ; 3.05 years ; Project A
Explanation:
The computation of the payback period for each project is as follows
For project A
In year 0 = $48,000
In year 1 = $18,500
In year 2 = $24,800
In year 3 = $20,500
In year 4 = $6,500
If we sum the first 2 year cash inflows than it would be $43,300
Now we subtract the $44,800 from the $48,000 , so the amount would be $4,700 as if we added the third year cash inflow so the total amount exceed to the initial investment. Hence, we deduct it
And, the next year cash inflow is $20,500
So, the payback period equal to
= 2 years + $4,700 ÷ $20,500
= 2.23 years
For project B
In year 0 = $93,000
In year 1 = $20,500
In year 2 = $25,500
In year 3 = $33,500
In year 4 = $247,000
If we sum the first 3 year cash inflows than it would be $79,500
Now we subtract the $44,800 from the $48,000 , so the amount is$13,500 as if we added the third year cash inflow so the total amount exceed to the initial investment. Therefore, we deduct it
And, the next year cash inflow is $247,000
So, the payback period equal to
= 3 years + $13,500 ÷ $247,000
= 3.05 years
As we can see that the project A has less payback period so the same is to be selected
