4. Consider the following two mutually exclusive projects: Year Cash Flow (A) Ca
ID: 2804332 • Letter: 4
Question
4. Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$
432,000
–$
43,500
1
40,500
21,100
2
65,500
12,600
3
82,500
22,100
4
547,000
18,900
The required return on these investments is 13 percent.
a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Payback period
Project A
Years
Project B
Years
Year
Cash Flow (A)
Cash Flow (B)
0
–$
432,000
–$
43,500
1
40,500
21,100
2
65,500
12,600
3
82,500
22,100
4
547,000
18,900
Explanation / Answer
A:
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=3+(243500/547000)=3.45 years(Approx).
B:
Hence payback=2+(9800/22100)=2.44 years(Approx).
Year Cash flows Cumulative Cash flows 0 (432000) (432000) 1 40500 (391500) 2 65500 (326000 3 82500 (243500) 4 547000 303500Related Questions
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