Question

Problem 8-3 Calculating Payback [LO 1) Global Toys, 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 -$49,000 $ 94,000 1 19,000 21,000 2 25,400 26,000 21000 33,000 7,000 246,000 Requirement 1: What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Project A Project B Payback period years years Requirement 2: Should it accept either of them? Click to select)

Answer 1

Answer:

Requirement 1:

Project A	2.22	Years
Project B	3.06	Years

Working Note:

Year		Cash flow A		Cash flow B
Cash flow A	Un recovered Cash flow	Cash flow B	Un recovered Cash flow
	[1]		[2]
0	(49,000.00)	(49,000.00)	(94,000.00)	(94,000.00)
1	19,000.00	(30,000.00)	21,000.00	(73,000.00)
2	25,400.00	(4,600.00)	26,000.00	(47,000.00)
3	21,000.00	16,400.00	33,000.00	(14,000.00)
4	7,000.00	23,400.00	246,000.00	232,000.00

Payback = Base year + unrecovered Cashflow in base year / Cash flow in subsequent year * 12
	Cash flow A	Cash flow B
Base Year	2	3
Unrecovered Cash flow in base year	4,600.00	14,000.00
Cash flow in subsequent year	21,000.00	246,000.00
Payback =	2 + 4600 / 21000*12	3 + 14000/246000*12
	2.63	0.68
Payback years =	2.22	3.06

Requirement 2:

Project A should be selected since payback period of Project A is less than Project B