Problem 8-3 Calculating Payback [LO 1] Global Toys, Inc., imposes a payback cuto

Question

Problem 8-3 Calculating Payback [LO 1] Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.

What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Year Cash Flow A Cash Flow B 0 –$ 46,000      –$ 91,000      1 17,500      19,500      2 23,600      24,500      3 19,500      34,500      4 5,500      249,000     

Explanation / Answer

Payback period A = 2 + (4900 / 19500) = 2 + 0.25 = 2.25 years

Payback Period B = 3 + (12500 / 249000) = 3 + 0.05 = 3.05 years

b)

Accept project A and reject project B

Year Cash Flow A Cumulative Cash flow A Cash Flow B Cumulative cash flow B 0 -46000 -46000 -91000 -91000 1 17500 -28500 19500 -71500 2 23600 -4900 24500 -47000 3 19500 14600 34500 -12500 4 5500 20100 249000 236500

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