Question

Siva, Inc., imposes a payback cutoff of three years for its international investment projects. Year ON + Cash Flow (A) -$ 52,000 19,000 20,000 17,000 4,000 Cash Flow C (B) $ 62,000 11,000 14,000 18,000 222,000 What is the payback period for both projects? (Round your answers to 2 decimal places, e.g., 32.16.) Project A Project B Payback period years years Which project should the company accept? O Project A O Project B

Answer 1

Project A

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

                             = 2 years +($52,000 - $13,000)/ $17,000

                             = 2 years + $13,000/ $17,000

                            = 2 years + 0.7647

                            = 2.76 years.

Project B

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

                            = 3 years +($62,000 - $43,000)/ $222,000

                            = 3 years + $19,000/ $222,000

                            = 3 years + 0.0856

                            = 3.09 years.

The company should accept project A since it’s payback period is less than the cut-off period.

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