The managing director of Jeffery’s Boatyard Ltd has £500,000 to invest in a new marine project and has asked you to provide information that will help him choose which is the more favourable of two potential projects. Details of the annual net cash flows are as follows:

(a) Calculate the payback period for each project.

(b) Recommend which of the two projects is likely to be the better investment, giving reasons to support your advice.

(c) Comment on any limitations of the technique you have used.

 

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Year Project 1 Project 2 1 80,000 90,000 2 100,000 110,000 3 180,000 190,000 4 140,000 110,000 5 100,000 80,000