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:

Calculate the payback period for Project A:

Payback period $=$ years

$3.$ 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$)$: $$ 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

$$

$x$ in the first year, while Project $B$ returns only $ $.$ The extra & $$ that Project $B$ returns in the first year could be put to productive use, such as investing in another project. The payback period thus! $$ the time value of money.

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