Question 4 (of uppose yout fim s comidering two mutualy exclusve, required proje

Question

Question 4 (of uppose yout fim s comidering two mutualy exclusve, required projects with the cash tows shown nyback stotistic for the projects are 2 and 3 years, respectively below The requred rate of return on projects of both of their risk class is 10 perce Project A Cash Flow Project B Cash Fow 27000 17000 37000 37000 17000 13.000 57,000 Use the payback decision rule to evaluate these projects, which onels) should be accepted or rejected? O reject A accept 8 O accept neither A nor B O accept both A and B O accept A reject B

Explanation / Answer

Ans Accept A, Reject B

PROJECT A PROJECT B Year Cash Flow Cumulative Cash Flow Year Cash Flow Cumulative Cash Flow 0 -27000 -27000 0 -37000 -37000 1 17000 -10000 1 17000 -20000 2 37000 27000 2 13000 -7000 3 8000 35000 3 57000 50000 Payback Period = 1 years + 10000/37000 Payback Period = 2 years + 7000/57000 1.27 YEARS 2.12 YEARS Project A has shorter payback period . So, Project A should be accepted and Project B should be Rejected

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