Problem 17 Intro Your firm is subject to capital rationing and can only invest $60,000. You've estimated the following cash flows (in $) for two projects: Year Project A Project B -57,000 -57,000 10,000 30,000 20,000 20,000 30,000 10,000 40,000 The required return for both projects is 8%. IB Attempt 1/10 for 10 pts. Part 1 What is the payback period for project A? Correct Payback period is the length of time required to "recover" the cost of an investment in a nominal sense (not adjusted for the time value of money). The projects pays back $10,000+ $20,000 = $30,000 in the first two years. Assuming that the cash flows occur evenly throughout year 3, the remaining $57,000 - $30,000 = $27,000 are recovered in $27,000/$30,000 = 0.9 years. Remaining cost to recover Payback = Years before full cost recovery + - Cash flow during the year 27,000 = 2 + 30,000 = 2.9 8 Attempt 1/10 for 10 pts. Part 2 What is the payback period for project B? 2+ decimals Submit