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Evaluate the following projects using the payback method assuming a rule of 3 years for payback. Year Project...

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Finance

Evaluate the following projects using the payback methodassuming a rule of 3 years for payback.

Year

Project A

Project B

0

-10,000

-10,000

1

4,000

4,000

2

4,000

3,000

3

4,000

2,000

4

0

1,000,000

Answer & Explanation Solved by verified expert
4.3 Ratings (726 Votes)

PROJECT A:
Year Cash flow Cumulative Cash Flow
0 $          -10,000 $            -10,000
1 $              4,000 $              -6,000
2 $              4,000 $              -2,000
3 $              4,000 $                2,000
Payback period = 2+2000/4000 = 2.5 years
PROJECT B:
Year Cash flow Cumulative Cash Flow
0 $          -10,000 $            -10,000
1 $              4,000 $              -6,000
2 $              3,000 $              -3,000
3 $              2,000 $              -1,000
4 $     10,00,000 $          9,99,000
Payback period = 3+1000/100000 = 3.01 years
EVALUATION:
Project A is to be accepted as it has a payback
of less than 3 years and Project B has to be
rejected as it has a payback of more than 3
years.
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