Given the cash flow of four projects, A, B, C, and D, and using Payback period. the payback period decision model, which projects do you accept and which projects do you reject with a four-year cutoff period for recapturing the initial cash outflow? For payback period calculations, assume that the cash flow is equally distributed over the year. Cash flow A B C D Cost $40,000 $25,000 $45,000 $120,000 Cash flow $ 4,000 $ 5,000 $20,000 $ 75,000 Year 1 Cash flow $ 6,000 $ 5,000 $ 25,000 $12,000 Year 2 Cash flow $ 9,000 $ 5,000 $ 20,000 $26,000 Year 3 Cash flow $ 14,000 $ 5,000 $ 15,000 $9,000 Year 4 Cash flow $ 16,000 $ 5,000 $ 0 $13,000 Year 5 Cash flow $ 20,000 $ 5,000 $ 0 $18,000 Year 6 ANSWER Project A: Year One: left to recover $40,000 $4,000 $36,000 Year Two: left to recover $36,000 $6,000 $30,000 Year Three: left to recover $30,000 $9,000 $21,000 Year Four: left to recover $21,000 $14,000 $7,000 Year Five: recovered $7,000 $16,000 fully Year Five: $7,000/$16,000 year needed for recovery /16 Payback Period for Project A: 4 and 7/16 years, REJECT! Project B: Year One: left to recover $25,000 $5,000 $20,000 Year Two: left to recover $20,000 $5,000 $15,000
Payback period. Given the cash flow of four projects, A, B, C, and D, and using the payback period decision model, which projects do you accept and which projects do you reject with a four-year cutoff period for recapturing the initial cash outflow? For payback period calculations, assume that the cash flow is equally distributed over the year. Cash flow A B C D Cost $40,000 $25,000 $45,000 $120,000 Cash flow Year 1 $ 4,000 $ 5,000 $20,000 $ 75,000 Cash flow Year 2 $ 6,000 $ 5,000 $12,000 $ 25,000 Cash flow Year 3 $ 9,000 $ 5,000 $26,000 $ 20,000 Cash flow Year 4 $ 14,000 $ 5,000 $9,000 $ 15,000 Cash flow Year 5 $ 16,000 $ 5,000 $13,000 $ 0 Cash flow Year 6 $ 20,000 $ 5,000 $18,000 $ 0 ANSWER Project A: Year One: $40,000 $4,000 $36,000 left to recover Year Two: $36,000 $6,000 $30,000 left to recover Year Three: $30,000 $9,000 $21,000 left to recover Year Four: $21,000 $14,000 $7,000 left to recover Year Five: $7,000 $16,000 fully recovered Year Five: $7,000/$16,000 /16 year needed for recovery Payback Period for Project A: 4 and 7/16 years, REJECT! Project B: Year One: $25,000 $5,000 $20,000 left to recover Year Two: $20,000 $5,000 $15,000 left to recover
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