Answer:
a.- PA 3.9
b.- PB 4.22
c.- It would seems a better investment using the payback period the project A.
d.- However, the project B net 3,500 while project A net 2,000
It would be better to apply and interest rate to discount the diferent cashflow and not decide only using this method
Explanation:
The payback represent the point during the life of the project at which you redeem the initial investment.
Usually
investment/cashflow(per years) = payback
Because the cash flow are not the same each period we are going to add the cash flow until we got a positive return
PROJECT A
cash flow -9000
YEAR 1 2200 -6800
YEAR 2 2500 -4300
YEAR 3 2500 -1800
YEAR 4 2000 200
YEAR 5 1800 2000
At the end of year 3 (beginning of year 4) the project is -1800 end of the year 4 we are 200 positive
So during this fourth year the project achieve the payback.
assuming the 2000 revenue are generated at a linear rate we calculate the payback, We divide the beginning balance by the cash flow of the year
1800/2000 = 0.9
3 complete years + 0.9 of 4th year = 3.9 years
Same procedure for PROJECT B
cash flow -9000
year 1 1500 -7500
year 2 1500 -6000
year 3 1500 -4500
year 4 3500 -1000
year 5 4500 3500
Durgin the 5th year the compay achieve the payback.
we divide the beginning balance by the cash flow
1000/4500 = 2/9 = 0.2222222222
4 complete year + 0.222222 = 4.222222 years
