consider the following three projects. All three have an initial investment of $
ID: 2398209 • Letter: C
Question
consider the following three projects. All three have an initial investment of $300,000
Net Cash Inflows
Project L
Project M
Project N
Year
Annual
Accumulated
Annual
Accumulated
Annual
Accumulated
1
$75,000
$75,000
$25,000
$25,000
$150,000
$150,000
2
75,000
150,000
75,000
100,000
150,000
300,000
3
75,000
225,000
200,000
300,000
4
75,000
300,000
250,000
550,000
5
75,000
375,000
350,000
900,000
6
75,000
450,000
7
75,000
525,000
8
75,000
600,000
Required
1.
Determine the payback period of each project. Rank the projects from most desirable to least desirable based on payback.
2.
Are there other factors that should be considered in addition to the payback? period?
Net Cash Inflows
Project L
Project M
Project N
Year
Annual
Accumulated
Annual
Accumulated
Annual
Accumulated
1
$75,000
$75,000
$25,000
$25,000
$150,000
$150,000
2
75,000
150,000
75,000
100,000
150,000
300,000
3
75,000
225,000
200,000
300,000
4
75,000
300,000
250,000
550,000
5
75,000
375,000
350,000
900,000
6
75,000
450,000
7
75,000
525,000
8
75,000
600,000
Explanation / Answer
Answer 1
Note : Payback period the total time in which the cost of investment is expected to get recovered. Thus in the given question, the years at which accumulated net cash flow equals the initial investment of $300,000 is the payback period for the project From the above mentioned table we get the Payback period as - 4 years for Project L ,3 years for Project M , 2 years for Project N.
The most desirable project is one which have minimum Payback period & least desirable project is one which have maximum Payback period.
Table showing ranking for the projects from most desirable to least desirable based on payback
Answer 2
Factors that should be considered in addition to the payback? period
Projects Payback period Rank Project N 2 years 1 Project M 3 years 2 Project L 4 years 3Related Questions
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