Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 - $ 343,000 - $ 50,000 1 52,000 24,700 2 72,000 22,700 3 72,000 20,200 4 447,000 15,300 Whichever project you choose, if any, you require a return of 16 percent on your investment. a-1 What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e. g., 32.16.)

The payback period for each of the project is - project A = 3.33 and project B = 2.13

Explanation:

First of all the payback period means the amount of time it would take for a company to recover its initial cost or investment which it has invested in the project.

Calculating the payback period for project A

Year Cash flow Cumulative Discounting Present Discounted

cash flow factor value cumulative flow

(NOTE - Formula used for discounting factor = 1 / (1 + i) ^n, where i = 16% which is the rate of return on the investment and n is the number of years.)

0 - $343,000 - $343,000 1 - $343,000 - $343,000

1 $52,000 - $291,000.86206 $44,828 - $298,172

2 $72,000 - $219,000.74314 $53,508 - $244,665

3 $72,000 - $147,000.64063 $46,127 - $198,537

4 $447,000 $300,000.55226 $2,46,874 $48,337

Now we will in which year the cash flow was last negative and then in that we will add (cumulative cash flow of the year it was last negative / cash flow of the next period).

= 3 + $147,000 / $447,000

= 3.33 (payback period for project A)

Calculating the payback period for project B

Year Cash flow Cumulative Discounting Present Discounted

cash flow factor value cash flow

0 - $50,000 - $50,000 1 - $50,000 - $50,000

1 $24,700 - $25,300.86206 $21,293 - $28,707

2 $22,700 - $2600.74314 $16,869 - $11,838

3 $20,200 $17,600. 64063 $12,941 $1013

4 $15,300 $32,900.55226 $8,450 $9463

Now we will in which year the cash flow was last negative and then in that we will add (cumulative cash flow of the year it was last negative / cash flow of the next period).

= 2 + 2600 / 20,200

= 2.13 (payback period for project B)