Apply the Concepts Suppose that a company is considering two different and mutually exclusive projects (A and B), where both have a five- year life and require an investment of $84,000. The cash flow patterns for each project are given below. Project A: Even cash flows of $28,000 per year. Project B: $48,000, $40,000, $36,000, $20,000, and $12,000. Required: 1. Calculate the payback period for Project A: Payback period = 3.0 years 2. Calculate the payback period for Project B by completing the following table. Round payback period to one decimal place. Unrecovered Investment Year (beginning of year) Annual Cash Flow Time Needed for Payback 1 84,000 $ 48,000 1 year 2 36,000 40,000 Thus, the payback for Project B is Project B is less risky 0.9 year* 1.9 years and is shorter and has less impact on liquidity. than payback for Project A; thus Thus, the payback for Project B is 1.9 years and is shorter than payback for Project A; thus Project B is less risky and has less impact on liquidity. 3. Now assume that a third project, Project C becomes available with the same investment outlay and the following annual cash flows (projects, A, B, and C are mutually exclusive): Project C: $66,000, $20,000, $50,000, $50,000, $50,000 a. Calculate the payback for Project C (round to one decimal place): 1.9 years. b. Project C has the same payback as Project B but should be preferred over Project B for two reasons. First, Project C provides $ 48,000 X more for the years beyond the payback period than Project B. Second, Project C returns 18,000 that Project 48,000 X in the first year, while Project B returns only $ 48,000 . The extra $ B returns in the first year could be put to productive use, such as investing in another project. The payback period thus ignores the time value of money.