Question

4- Shell Camping Gear Inc. is considering two mutually exclusive projects. Each requires an initial investment (CF) of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with each project are shown in the following table. Cash inflows (CF) Year Project A Project B 1 S10.000 S40.000 2 20.000 30.000 3 30.000 20.000 4 40.000 10.000 5 20.000 20.000 a. Determine the payback period of each project. b. Because they are mutually exclusive, Shell must choose one. Which should the company invest in? c. Explain why one of the projects is a better choice than the other.

Answer 1

A B с D E F G Н 1 Year 0 1 2 2 3 4 5 6 7 8 9 10 11 12 13 PROJECT A Cash Flow Cumulative cash flow $-1,00,000.00 $ -1,00,000.00 $ 10,000.00 $ -90,000.00 $ 20,000.00 $ -70,000.00 $ 30,000.00 $ -40,000.00 $ 40,000.00 $ $ 20,000.00 $ 20,000.00 PROJECT B Cash Flow Cumulative cash flow $-1,00,000.00 $ -1,00,000.00 $ 40,000.00 $ -60,000.00 $ 30,000.00 $ -30,000.00 $ 20,000.00 $ -10,000.00 $ 10,000.00 $ $ 20,000.00 $ 20,000.00 3 4 5 Answer Answer Required Payback Period Formula =B7+-E7/D8 Formula =B7+-H7/G8 4.00 4.00

B. Since, both the projects are payback period is 4.00 Year, We can choose any of the projects.

Answer 2

Project A = 3+ 30000/20000 = 4.5

project B= 3+ 20000/20000 = 4 years 

since the projects are mutually exclusive, it should choose B because it has the lowest payback period.