Question

Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.

Year	Cash Flow (A)		Cash Flow (B)
0	–$	75,000	–$	125,000
1		33,000		29,000
2		36,000		32,000
3		19,000		35,000
4		9,000		240,000

What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Which, if either, of the projects should the company accept?

Project A= ? years

Project B=? years

Project acceptance?

Answer 1

Project A
Year	Cash flow stream	Cumulative cash flow
0	-75000	-75000
1	33000	-42000
2	36000	-6000
3	19000	13000
4	9000	22000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-6000))/(13000-(-6000))
2.32 Years
Accept project as payback period is less than 3 years
Project B
Year	Cash flow stream	Cumulative cash flow
0	-125000	-125000
1	29000	-96000
2	32000	-64000
3	35000	-29000
4	240000	211000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-29000))/(211000-(-29000))
3.12 Years
Reject project as payback period is more than 3 years