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Suzanne's Cleaners is considering two projects with the following cash flow data. Based on payback periods,...

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Finance

  1. Suzanne's Cleaners is considering two projects with thefollowing cash flow data. Based on payback periods, which projectis less risky based on liquidity risk?

    PROJECT 1

    Year

    0

    1

    2

    3

    4

    5

    Cash flows

    -$1,100

    $300

    $310

    $320

    $330

    $340

    PROJECT 2

    Year

    0

    1

    2

    3

    4

    5

    Cash flows

    -$850

    $100

    $75

    $500

    $200

    $275

    A.

    Project 1

    B.

    Project 2

Answer & Explanation Solved by verified expert
3.8 Ratings (714 Votes)

a.Project 1

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 3 years + 170/ 330

                              = 3 years + 0.52

                              = 3.52 years.        

b.Project 2

Payback period= 3 years + 175/ 200

                              = 3 years + 0.88

                              = 3.8 years.

Project 1 is less risky based on liquidity risk since it has the shorter payback period.

In case of any query, kindly comment on the solution.
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Transcribed Image Text

Suzanne's Cleaners is considering two projects with thefollowing cash flow data. Based on payback periods, which projectis less risky based on liquidity risk?PROJECT 1Year012345Cash flows-$1,100$300$310$320$330$340PROJECT 2Year012345Cash flows-$850$100$75$500$200$275A.Project 1B.Project 2

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