Question

bui bakery has a required payback period of two years for all of its projects. currently, the firm is analyzing two independent projects. project x has an expected payback period of 1.4 years and a net present value of $6,100. project z has an expected payback period of 2.6 years with a net present value of $18,600. which project(s) should be accepted based on the payback decision rule?

Answer 1

Project X should be accepted based on payback decision rule.

What is payback decision rule?

The payback period is one of the most popular and traditional methods of evaluating investment proposals. The payback period of the project is the period needed to recover the initial investment from the net inflows generated from the project.

Firms use payback period as accept or reject criterion for its project . If the payback period calculated for the project is less than the maximum payback period set by the management, it would be accepted, if not it would be rejected. The payback period for Project x is less than required payback period of two years of Bui bakery's all other project.

Project x is selected for its shorter payback period of 1.4 years than project z having a payback period of 2.6 years.

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