Question

Project Ell requires an initial investment of​ $50,000 and the produces annual cash flows of​ $30,000, $25,000, and​ $15,000. Project Ess requires an initial investment of​ $60,000 and then produces annual cash flows of​ $25,000 per year for the next ten years. The company ranks projects by their payback periods.

Answer 1

Ell will be ranked higher than Ess. because Payback period for Ell is 1.80 years whereas, payback period of Ess is 2.40 years.since company ranks projects by their payback periods. Ell will be ranked higher

Computation of Payback period of Project Ell Computation of Payback period of Project Ess Year Initial investment 1 2 3 Cash Flows Cumm. Cash flows Investment still to be covered -50,000.00 -50,000.00 30,000.00 30,000.00 -20,000.00 25,000.00 55,000.00 5,000.00 15,000.00 70,000.00 20,000.00 Payback period = Year before investment covered fully + (Investment still to be covered/cash flow in the year fully covered)year Year Cash Flows Cumm. Cash flows Investment still to be covered Initial investment -60,000.00 -60,000.00 1 25,000.00 25,000.00 -35,000.00 2 25,000.00 50,000.00 -10,000.00 3 25,000.00 75,000.00 15,000.00 4 25,000.00 1,00,000.00 40,000.00 5 25,000.00 1,25,000.00 65,000.00 6 25,000.00 1,50,000.00 90,000.00 7 25,000.00 1,75,000.00 1,15,000.00 8 25,000.00 2,00,000.00 1,40,000.00 9 25,000.00 2,25,000.00 1,65,000.00 10 25,000.00 2,50,000.00 1,90,000.00 Year before investment fully covered = Year 1 Investment still to be covered in year 2 = $20,000 Payback Period = yr 1 + (20,000/25,000)yr Payback Period = yr 1 + 0.80yr So, Payback period = 1.80 years Year before investment fully covered = Year 2 Investment still to be covered in year 3 = $10,000 Payback Period = yr 1 + (10,000/25,000)yr Payback period = yr 2 +0.40yr So, Payback period = 2.40 years