Choosing between two projects with acceptable payback periods Shell Camping Gear, Inc. , is considering two mutually

Question:

Choosing between two projects with acceptable payback periods Shell Camping Gear, Inc. , is considering two mutually exclusive projects. Each requires an initial investment 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 (CFt)

Year Project A Project B

1 $10,000 $40,000

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.

Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...