E10-1 Elysian Fields, Inc., uses a maximum payback period of 6 years and current
ID: 2749967 • Letter: E
Question
E10-1 Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000; project Helium requires an initial outlay of $35,000. Using the expected cash inflows given for each project in the following table, calculate each project's payback period. Which project meets Elysian's standards?
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Expected Cash Inflows Year Hydrogen Helium 1 $6,000 7,000 2 6,000 7,000 3 8,000 8,000 4 4,000 5,000 5 3,500 5,000 6 2,000 4,000Explanation / Answer
Calculation of the Payback Period Hydrogen Year cash Flow Cumulative 0 -25000 -25000 1 6000 -19000 2 6000 -13000 3 8000 -5000 4 4000 -1000 5 3500 2500 6 2000 4500 Payback Period = 4+1000/3500 4.28 Years Helium Year cash Flow Cumulative 0 -35000 -35000 1 7000 -28000 2 7000 -21000 3 8000 -13000 4 5000 -8000 5 5000 -3000 6 4000 1000 Payback Period = 5+3000/4000 5.75 Years The payback period of both is less than 6 years therefore both the projects meets the standards
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