Answer:
The correct option is d. Project B.
Step-by-step explanation:
Note: See the attached excel file for the calculation of the Cumulative Cash Flows of Projects A and B.
Payback period refers to the number of time or period that is needed to recoup the amount of money spent a project. The
payback period rule states that when considering two or more projects, a project with the shortest payback period should be selected.
Payback period can be calculated as follows:
Payback period = Time before full recovery + (Unrecovered cost at start of the time of full recovery / Cash flow during the time of full recovery) ………………. (1)
Using the information in the excel file (in red color), equation (1) can be calculated for Project A and Project B as follows:
Project A payback period = 2 + ($1,000 / $3,000) = 2.33
Project B payback period = 2 + ($3,000 / $10,000) = 2.30
Since the payback period of Project B payback period which is 2.30 is lower than the Project A payback period of 2.33, Project B should be selected.
Therefore, the correct option is d. Project B.
