Question

Two new wind-farm tower projects are proposed for a small company that installs them in south western Wisconsin. Project A will cost $250,000 to complete and is expected to have an annual net cash flow of $75,000. Project B will cost $150,000 to complete and should generate annual net cash flows of $52,000. As a small company, the owner and senior management team are very concerned about their cash flow. Use the payback period method and determine which project is better from a cash flow standpoint

Answer 1

Answer:

The Project B is  better from a cash flow standpoint.

Explanation:

Payback period : The payback period is that period in which the investment amount is being repay to the company back in terms of profits or savings.

The formula to compute payback period is shown below

Payback period = Initial Investment ÷ Annual net cash inflows

For Project A = $250,000 ÷ $75,000

                      = 3.33 years

For Project B = $150,000 ÷ $52,000

                      = 2.88 years

By computing the payback period for both the projects, the Project B has less payback period than Project A.

Hence, the Project B is  better from a cash flow standpoint.