Question

Problem 9-3 Calculating Payback [LO2] Siva, Inc., imposes a payback cutoff of three years for its international investment projects Cash Flow Year Cash Flow (A) 67,000S 26,500 35,000 24,500 11,500 77,000 18,500 21,500 33,000 237,000 2 4 What is the payback period for both projects? (Round your answers to 2 decimal places, e.g., 32.16.) Payback period Project A Project B years years Which project should the company accept? O Project B O Project A

Answer 1

A:

Year	Cash flows	Cumulative Cash flows
0	(67000)	(67000)
1	26500	(40500)
2	35000	(5500)
3	24500	19000
4	11500	30500

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(5500/24500)

=2.22 years(Approx).

B:

Year	Cash flows	Cumulative Cash flows
0	(77000)	(77000)
1	18500	(58500)
2	21500	(37000)
3	33000	(4000)
4	237000	233000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(4000/237000)

=3.02 years(Approx).

Hence A must be accepted having lower payback and within 3 years .