Financial Solution

In: Business and Management

Submitted By tasmina2001
Words 4688
Pages 19
Problems and Solutions

1. Payback Period – Given the cash flows of the four projects, A, B, C, and D, and using the Payback Period decision model, which projects do you accept and which projects do you reject with a three year cut-off period for recapturing the initial cash outflow? Assume that the cash flows are equally distributed over the year for Payback Period calculations.

|Projects |A |B |C |D |
|Cost |$10,000 |$25,000 |$45,000 |$100,000 |
|Cash Flow Year One |$4,000 |$2,000 |$10,000 |$40,000 |
|Cash Flow Year Two |$4,000 |$8,000 |$15,000 |$30,000 |
|Cash Flow Year Three |$4,000 |$14,000 |$20,000 |$20,000 |
|Cash Flow Year Four |$4,000 |$20,000 |$20,000 |$10,000 |
|Cash Flow year Five |$4,000 |$26,000 |$15,000 |$0 |
|Cash Flow Year Six |$4,000 |$32,000 |$10,000 |$0 |

Solution

Project A: Year One: -$10,000 + $4,000 = $6,000 left to recover Year Two: -$6,000 + $4,000 = $2,000 left to recover Year Three: -$2,000 + $4,000 = fully recovered Year Three: $2,000 / $4,000 = ½ year needed for recovery Payback Period for Project A: 2 and ½ years, ACCEPT! Project B: Year One: -$25,000 + $2,000 = $23,000 left to recover Year Two:…...

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