Problem 8-15 Comparing Investment Criteria [LO 1, 3, 4, 6] Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 - $428,000 - $41,500 1 42,500 20,700 2 63,500 13,000 3 80,500 20,100 4 543,000 16,900 The required return on these investments is 14 percent. Required: (a) What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e. g., 32.16).) Payback period Project A years Project B years

Payback period (A) is 3.44 years

Payback period (B) is 2.39 years

Explanation:

Cash Flow (A) - $428,000; $42,500; $63,500; $80,500; $543,000

Cash Flow (B) - $41,500; $20,700; $13,000; $20,100; $16,900

The payback period will note consider discounting rate, thus we do manual counting till the cash flow equal to zero (0)

Payback period = Number of Years immediately preceding year of break-even + (investment - cashflow of Years immediately preceding year of break-even) / cashflow of year break - even

Project A will be break even in Year 4, then

Payback period (A) = 3 years + ($428,000 - ($42,500+$63,500+$80,500)) / $543,000 = 3.44 years

Project B will be break even in Year 3, then

Payback period (B) = 2 years + ($41,500 - ($20,700+$13,000)) / $20,100 = 3.44 years = 2.39 years