You are considering 3 independent projects, project A, project B, and project C.

Question

You are considering 3 independent projects, project A, project B, and project C. Given the following cash flow information, calculate the payback period for each

If you require a 3-year payback before an investment can be accepted, which project(s) would be accepted?

Full Point will be given for work shown

Project A Project B Project C Initial Outlay -1,000 -10,000 -5,000 Inflow Yr 1 600 5,000 1,000 Inflow Yr 2 300 3,000 1,000 Inflow Yr 3 200 3,000 2,000 Inflow Yr 4 100 3,000 2,000 Inflow Yr 5 500 3,000 2,000

Explanation / Answer

Payback period for project A:

payback period = 2+(100/200)

=2.5 years

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Payback period for project B:

Payback period = 2+(2000/3000)

=2.67 years

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payback period for project C:

Payback period = 3+(1000/2000)

=3.5 years

Hence, project A should be accepted as its payback period is the lowest

Year cash flow Cumulative cash flow 0 -1,000 -1,000 1 600 -400 2 300 -100 3 200 100 4 100 200 5 500 700

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