Question

Tri Star, Inc., has the following mutually exclusive projects:

Year	Project A				Project B
0	–$	13,700			–$	9,100
1		8,300				3,800
2		6,900				3,300
3		2,100				5,700

Calculate the payback period for each project.

Answer 1

The answers are:

A's payback	1.78	years
B's payback	2.35	years

Calculations are shown below:

Payback period for project A:

Year	Cash flow of Project A	Cumulative cash flow
0	-13,700.00	-13,700.00
1	8,300.00	-5,400.00
2	6,900.00	1,500.00
3	2,100.00

Thus payback for project A = 1 year+(5400/6900) = 1.78 years

Payback for project B:

Year	Cash flow of Project B	Cumulative cash flow
0	-9,100.00	-9,100.00
1	3,800.00	-5,300.00
2	3,300.00	-2,000.00
3	5,700.00	3,700.00

Payback for B = 2+(2000/5700) = 2.35 years