Question

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. 0 3 8000 1 28.000 2 48.000 19.000 Time: Project A Cash Flow Project B Cash Flow -48,000 28,000 2,000 68,000 Use the payback decision rule to evaluate these projects, which one() should it be accepted or rejected? Multiple Choice O accept both A and B o accept A reject o reject A, accept

Answer 1

Project A Year CF Cumulative cash flow (38,000.00) (38,000.00) 28,000.00 (10,000.00) 48,000.00 38,000.00 19,000.00 57,000.00 1.21 Project B Year CF Cumulative cash flow 0 (48,000.00) (48,000.00) 1 28,000.00 (20,000.00) 2 2,000.00 (18,000.00 3 68,000.00 50,000.00 Payback 2.26 Payback

Project B Year 0 Project A Year CF Cumulative cash flow |-38000 I=B3 128000 I=C3+B4 | 48000 1=C4+B5 19000 1=C5+B6 Payback =A4+-C4/B5 CF Cumulative cash flow - 48000 =F3 28000 =G3+F4 2000 =G4+F5 68000 =G5+F6 =E5+-G5/F6 Payback

The answer is accept A, reject B