Buy Coastal, Inc., imposes a payback cutoff of 4 years for its international inv

Question

Buy Coastal, Inc., imposes a payback cutoff of 4 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, a)reject or B) accept project A and a)reject or B) accept project B(Round your answers to 3 decimal places. (e.g., 32.162))

Year Cash Flow (A) Cash Flow (B)
0 $37,000 $63,000 
1 21,000 11,000 
2 30,000 16,000 
3 19,000 27,000 
4 4,000 271,000 "

Explanation / Answer

Project A Initial investment 37000 After year 1 = 37000-21000 = 16000 Year 2 cash flow = 30000 Payback = 1 + 16000/30000 = 1.533 Years Project B Initial investment 63000 After year 1 = 63000-11000 = 52000 After year 2 = 52000-16000 = 36000 After year 3 = 36000-27000 = 9000 Year 4 cash flow = 271000 Payback = 3 + 9000/271000 = 3.033 Years Cutoff payback = 4 years --> ACCEPT both A and B

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