Question # 2

Al Bostaan Incorporation uses discounted payback period for projects under $25,000 and has a cut off period of 4 years for these small value projects. Two projects, R and S are under consideration. The anticipated cash flows for these two projects are listed below. If Al Bostaan Incorporation uses an 8% discount rate on these projects are they accepted or rejected? If they use 12% discount rate? If they use a 16% discount rate? What do you notice about the payback period as the discount rate rises? Explain this relationship.

Cash Flows	Project R	Project S
Initial Cost	$24,000	$18,000
Cash flow year one	$6,000	$9,000
Cash flow year two	$8,000	$6,000
Cash flow year three	$10,000	$6,000

Cash flow year four

$12,000

$3,000