Question

Question 6 10 pts Two mutually exclusive projects are under consideration: Year Project A -$7,100 4,000 4,000 Project B -$7,500 2,000 2,500 4,000 3,000 4,000 3,500 4,000 4,000 Which project should be selected if the simple payback method is used to make the determination? O A; its payback period is shorter O B; its payback period is longer O Not enough information

Answer 1

Ans A; Its payback period is shorter (1.78 years)

In mutually exclusive project we must choose the project with shorter payback period.

PROJECT A
Year	Cash Flow	Cumulative Cash Flow
0	-7100	-7100
1	4000	-3100
2	4000	900
3	4000	4900
4	4000	8900
5	4000	12900
TOTAL	12900
Payback Period =	1 YEAR + 3100/4000
	1.78 YEARS
PROJECT B
Year	Cash Flow	Cumulative Cash Flow
0	-7500	-7500
1	2000	-5500
2	2500	-3000
3	3000	0
4	3500	3500
5	4000	7500
TOTAL	7500
Payback Period =	3 YEARS