Given below are the cash flows of four projects, A, B, C, and D. Assume that the cash flows are equally distributed over the year for Payback Period calculations. (all amounts in AED)

Pro ects

Initial investment

10,000

25,000

45,000

100,000

Year One

2,000

10,000

40,000

Year Two

4,000

8,000

15,000

30,000

Year Three

14,000

20,000

20,000

Year Four

20 000

20,000

10,000

Year Five

26,000

15,000

0

Year Six

32,000

10,000

Required:

Using the Payback Period decision model, which projects do you accept and which projects do you reject given the acceptable cut-off period is three years?

Project A

Year	Cash Flow	Cumulative Cash Flow
	10,000	10,000
1		6,000
2		2,000
3		2,000
4	4 000	6,000
5	4 000	10 000
6	4 000	14 000

Payback Period - - 2 years + (2,000 14,000)

Payback period = 2.5 years [2 years & 6 months]

Proiect B

Year	Cash Flow	Cumulative Cash Flow
	25,000	25 000
1	2,000	23,000
2	8,000	15,000
3	14,000	1 ,ooo
4	20,000	19,000
5	26,000	45,000
6	32,000	77,000

Payback Period = 3 years + (1,000 / 20,000)

Payback period = 3.05 years [Approximately 3 years & 15 days]

Protect C

Year	Cash Flow	Cumulative Cash Flow
0	45,000	45,000
1	10,000	35,000
2	15,000	20,000
3	20,000
4	20,000	20,000
5	15,000	35,000
6	10,000	45,000

Payback Period = 3 years

Payback period = 3 years

Proiect D

Year	Cash Flow	Cumulative Cash Flow
	100,000	(1 oo,ooo
1	40,000	60,000
2	30,000	30,000
3	20,000	10,000
4	10,000
5
6

Payback period -- 4 years

Payback period rule = Accept all projects where the cut-off is 3 years or less

Therefore, Project A & Project C -- Should be accepted.