Baker\'s Supply imposes a payback cutoff of 3.5 years for its intemational inves

Question

Baker's Supply imposes a payback cutoff of 3.5 years for its intemational investment projects. If the company has the following two projects available, which project(s), if either, should it accept? Year Cash Flow Cash (A FowB) 0 $62,000-$26,000 7,100 15,600 ,8008400 1,900 1,100 28,700 4 45,900 O Reject both Projects A and B O Both Project A and B are acceptable but you can select only one project O Accept Project B but not Project A Accept both Projects A and B O Accept Project A but not Project B

Explanation / Answer

PROJECT A: Year Cash flow Cumulative Cash Inflow 0 -62000 1 7100 7100 2 9800 16900 3 28700 45600 4 45900 91500 Payback = 3+(62000-45600)/45900 = 3.36 years. PROJECT B: Year Cash flow Cumulative Cash Inflow 0 -26000 1 15600 15600 2 8400 24000 3 1900 25900 4 1100 27000 Payback = 3+(26000-25900)/1100 = 3.09 years DECISION: ACCEPT BOTH PROJECTS A & B (If the projects are not mutually exclusive) The reason is that their paybacks are less than the cutoff payback of 3.5 years. NOTE: The requirement is confusing when it says which projects, if either, should it accept'. If the projects are mutually exclusive, that is if only one of them can be accepted, B is to be chosen as it has lower payback.

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