Question

Payback period calculations) You are considering the independent projects project A project before an investment can be accepted, which project(s) would be nccepted? and project. Given the cash flow information in the popup Window, calculate the payback period for each. If you require a year payback

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A F I Year CF Project A CF Cum. CF ($1,000) ($1,000 $700 ($300) $200 ($100) $300 $200 $400 $500 $900 Ε Project B Cum. CF ($10,500) ($10,500) $4,000 ($6,500) $4,000 ($2,500) $4,000 $1,500 $5,500 $4,000 $9,500 G H Project C CF Cum. CF ($5,500) ($5,500) $2,000 ($3,500) $2,000 ($1,500) $2,000 $500 $2,000 $2,500 $2,000 $4,500 $200 3 4. 5T $4,000 Required Payback period 3 years Project A Project B Projec C Payback Period 2.33 2.63 2.75 Payback period of all three projects within 3 years But Project A has lowest Payback Period Thus, Best Choice Project A

Cell reference -

A B C E G 1 CE CF CF -5500 2 3 4 5 0 1 2 -1000 700 D Project A Cum. CF =C3 =D3+C4 =D4+C5 =D5+C6 =D6+C7 =D7+08 2000 -10500 4000 4000 4000 Project B Cum. CF =E3 =F3+E4 =F4+E5 =F5+E6 =F6+E7 =F7+E8 H Project C Cum. CF =G3 =H3+G4 =H4+G5 =H5+G6 =H6+G7 =H7+G8 200 2000 2000 300 200 500 4000 2000 8 5 |4000 2000 10 Required Payback period 3 years Project A Project B Projecc Payback Period =B5+-D5/C6 =B5+-F5/E6 =B5+-H5/G6 Payback period of all three projects within 3 years But Project A has lowest Payback Period Thus, Best Choice Project A 20

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