Question

X-treme Vitamin Company is considering two investments, both of which cost $46,000. The cash flows are as follows: Year Project A Project B 1 $ 48,000 $ 46,000 2 19,000 21,000 3 16,000 20,000 Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a-1. Calculate the payback period for Project A and Project B.

Answer 1

Answer and Explanation:

The computation of the payback period for project A and project B is shown below:

Year   Project A    Cumulative        Project B   Cumulative cash inflow

                              cash inflow  

1       $ 48,000 $48,000         $46,000      $46,000

2 $19,000          $67,000 $21,000       $67,000

3 $16,000          $83,000         $20,000     $87,000

Now

Payback is

= Cash outflow ÷ Cumulative inflow Payback

For project A

= $46,000 ÷ $48,000

= 0.96 years  

For project B

= $46,000 ÷ $46,000

= 1 year