Question

Offshore Drilling Products, 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
3		21,000		33,000
4		7,000		246,000

Requirement 1:

What is the payback period for each project? (Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Payback period
Project A________	years
Project B________	years

Requirement 2:

Should it accept either of them?

(Click to select)Accept both projects A and B or Accept project A and reject project B or Reject both projects A and B or Accept project B and reject project A

Answer 1

Formula to calculate payback period is as follows: Payback period = Last period with a negative cumulative cash flow Absolute value of cumulative cash flows at that period Cash flow after that period Following are the input used to calculate payback period: А в D Cash flow Cash flow (A) Cumulative cash flow Cumulative cash flow (B) Year 1 20 3 1 4 2 - 49000 19000 25400 21000 7000 =B2 =C2+B3 =C3+B4 =C4+B5 =C5+B6 -94000 21000 26000 33000 246000 =D2 =E2+D3 =E3+04 =E4+D5 =E5+D6 64 PAYBACK PERIOD (A) =A4+1-C4/B5) PAYBACK PERIOD (B) =A5+(-E5/D6) Following are the results for the input used:

А. B E Cash flow (A) Cumulative cash flow Cash flow (B) Cumulative cash flow u Awn Year 0 1 2 3 4 $ $ $ $ $ (49,000.00) $ 19,000.00 $ 25,400.00 $ 21,000.00 $ 7,000.00 $ (49,000.00) $ (94,000.00) $ (30,000.00) $ 21,000.00 $ (4,600.00) $ 26,000.00 $ 16,400.00 $ 33,000.00 $ 23,400.00 $ 246,000.00 $ (94,000.00) (73,000.00) (47,000.00) (14,000.00) 232,000.00 PAYBACK PERIOD (A) 2.22 PAYBACK PERIOD (B) 3.06 00 As the company imposes a payback cutoff of three years for its international investment projects it should Accept project A and reject project B as project A's payback period is faster and is before 3 years. Thus, correct option is Accept project A and reject project B