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 $73,440. The cash flow patterns for each project are given below.

Project A: Even cash flows of $27,200 per year.

Project B: $48,300, $40,000, $36,200, $20,400, and $11,800.

Required:

1.

Calculate the payback period for Project A (round to one decimal place):

Payback period = ??? years

2.

Calculate the payback period for Project B by completing the following table:

Year	Unrecovered Investment (beginning of year)	Annual Cash Flow	Time Needed for Payback
1	$	$		?? year
2				?? year

Thus, the payback for Project B is ??? years and is - Select your answer -longershorterItem 9 than payback for Project A; thus Project B is - Select your answer -less riskymore riskyItem 10 and has - Select your answer -morelessItem 11 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: $66,900, $20,300, $51,500, $51,500, and $51,500

a.	Calculate the payback for Project C (round to one decimal place):
	Payback period = ??? years
b.	Project C should be preferred over project B for two reasons. First, Project C provides $ ??? more for the years beyond the payback period than Project B. Second, Project C returns $ ??? in the first year, while Project B returns only $ ??? . The extra $ ??? that Project C returns in the first year could be put to productive use, such as investing in another project. The payback period thus - Select your answer -ignoresconsidersItem 17 the time value of money.