Answer:
Project A should be accepted as it has less payback period
Explanation:
In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:
For Project A
In year 0 = $1,000
In year 1 = $600
In year 2 = $300
In year 3 = $200
In year 4 = $100
In year 5 = $500
If we sum the first 2 year cash inflows than it would be $900
Now we deduct the $900 from the $1,000 , so the amount would be $100 as if we added the third year cash inflow so the total amount exceed to the initial investment. So, we deduct it
And, the next year cash inflow is $200
So, the payback period equal to
= 2 years + $100 ÷ $200
= 2.5 years
For Project B
In year 0 = $10,000
In year 1 = $5,000
In year 2 = $3,000
In year 3 = $3,000
In year 4 = $3,000
In year 5 = $3,000
If we sum the first 2 year cash inflows than it would be $8,000
Now we deduct the $8,000 from the $10,000 , so the amount would be $2,000 as if we added the third year cash inflow so the total amount exceed to the initial investment. So, we deduct it
And, the next year cash inflow is $3,000
So, the payback period equal to
= 2 years + $2,000 ÷ $3,000
= 2.67 years
For Project C
In year 0 = $5,000
In year 1 = $1,000
In year 2 = $1,000
In year 3 = $2,000
In year 4 = $2,000
In year 5 = $2,000
If we sum the first 3 year cash inflows than it would be $4,000
Now we deduct the $4,000 from the $5,000 , so the amount would be $1,000 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it
And, the next year cash inflow is $2,000
So, the payback period equal to
= 3 years + $1,000 ÷ $2,000
= 3.5 years
So, Project A should be accepted as it has less payback period
