TWO new software projects are proposed to a young, startup company. The Alpha pr

Question

TWO new software projects are proposed to a young, startup company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?

This problem has been giving me issues. Please help and show how you got the answer. Thank you!

Explanation / Answer

Alpha Project has investment $150000. Annual Cash flow is $40000.

Assuming Non Discounted cash flow Since it is not mentioned in the question.

Payback period = Cost of investment / ( Annual Cash flow) = 150000/40000 = 3.75 years

Beta Project has investment $150000. Annual Cash flow is $40000.

Payback period = Cost of investment / ( Annual Cash flow) = 200000/50000 = 4 years

Now from the payback period method we can say that Alpha project is better since payback period is less.

Payback period signifies that in how much time your investment will be recovered ,sooner the investment is recovered sooner you will make profit from the project and hence Less payback period is always appreciated.

Hence project Alpha is better.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.