Consider the following cash flows on two projects: Project A Project B Time 0 -1
ID: 2762349 • Letter: C
Question
Consider the following cash flows on two projects:
Project A
Project B
Time 0
-10,000
-10,000
Time 1
5,000
4,000
Time 2
5,000
3,000
Time 3
3,000
10,000
If WiseGuy Inc. uses payback period rule to choose projects, which of the projects (Project A or Project B) will rank highest?
A) Project A
B) Project B
C) Project A and Project B have the same ranking.
D) Cannot calculate a payback period without a discount rate.
Project A
Project B
Time 0
-10,000
-10,000
Time 1
5,000
4,000
Time 2
5,000
3,000
Time 3
3,000
10,000
Explanation / Answer
Computation of payback period
Year Project A Cummulative cash flows Project B cummulative cash flows
1 5000 5000 4000 4000
2 5000 10000 3000 7000
3 3000 13000 10000 17000
Payback period :
Project A = 2 Years
Project B = 2+ 3000 / 10000
= 2+ 0.3 = 2.3 years
Project A has Intial amount is return within 2 years and Project B has initial amount is return within 2.3 years
Project A has best to the Wise Guy Inc. company.
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