Buy Coastal, Inc., imposes a payback cutoff of three years for its international

Question

Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. Suppose the company has the following two projects available. Project A has payback period of  years, while project B has a payback period of  years. Therefore, it should (Click to select)rejectaccept project A and (Click to select)rejectaccept project B. (Round your answers to 3 decimal places. (e.g., 32.162))

Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. Suppose the company has the following two projects available. Project A has payback period of  years, while project B has a payback period of  years. Therefore, it should (Click to select)rejectaccept project A and (Click to select)rejectaccept project B. (Round your answers to 3 decimal places. (e.g., 32.162))

Explanation / Answer

Payback period for project A = [1 + ($40,000 - $19,000) / $25,000] years

= 1.840 years which is less than cut off period of 3 years and therefore should be accepted.

Payback period for project B = [3 + ($60,000 - $14,000 - $17,000 - $24,000) / $270,000] years

= 3.019 years which is greater than cut off period of 3 years and therefore should be rejected.

Conclusion: Project A should be accepted and Project B should be rejected.

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