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Payback Period 2

The document calculates the payback periods for projects E, F, G, and H. Project E has a payback period of 4 years, project F has a payback period of 2.45 years, project G has a payback period of 2.5 years, and project H has a payback period of 3.5 years. With a cutoff period of 3 years, projects F and G would be accepted since their payback periods are within 3 years, while projects E and H would be rejected since their payback periods exceed 3 years.

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Sharulatha S
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44 views2 pages

Payback Period 2

The document calculates the payback periods for projects E, F, G, and H. Project E has a payback period of 4 years, project F has a payback period of 2.45 years, project G has a payback period of 2.5 years, and project H has a payback period of 3.5 years. With a cutoff period of 3 years, projects F and G would be accepted since their payback periods are within 3 years, while projects E and H would be rejected since their payback periods exceed 3 years.

Uploaded by

Sharulatha S
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

2. Payback period. What are the payback periods of Projects E, F, G and H?

Assume all the


cash flows are evenly spread throughout the year. If the cutoff period is three years,
which projects do you accept?

ANSWER
Project E:
Year One: -$40,000 + $10,000 = $30,000 left to recover
Year Two: -$30,000 + $10,000 = $20,000 left to recover
Year Three: -$20,000 + $10,000 = $10,000 left to recover
Year Four: -$10,000 + $10,000 = fully recovered
Year Four: $10,000 / $10,000 = full year needed
Payback Period for Project E: 4 years
Project F:
Year One: -$250,000 + $40,000 = $210,000 left to recover
Year Two: -$210,000 + $120,000 = $90,000 left to recover
Year Three: -$90,000 + $200,000 = fully recovered
Year Three: $90,000 / $200,000 = 0.45 year needed
Payback Period for Project F: 2.45 years
Project G:
Year One: -$75,000 + $20,000 = $55,000 left to recover
Year Two: -$55,000 + $35,000 = $20,000 left to recover
Year Three: -$20,000 + $40,000 = fully recovered
Year Three: $20,000 / $40,000 = 0.5 year needed
Payback Period for Project G: 2.5 years
Project H:
Year One: -$100,000 + $30,000 = $70,000 left to recover
Year Two: -$70,000 + $30,000 = $40,000 left to recover
Year Three: -$40,000 + $30,000 = $10,000 left to recover
Year Four: -$10,000 + $20,000 = fully recovered
Year Four: $10,000 / $20,000 = 0.5 year needed
Payback Period for Project H: 3.5 years
With a three year cut-off period, ACCEPT F and G, REJECT E and H.

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