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Garcia and Sons has a required payback period of five years for all of its projects....

Garcia and Sons has a required payback period of five years for all of its projects. The company is comparing two independent projects. Project Aracena has an expected payback period of 3.6 years and a net present value of $465,800. Project Bilbao has an expected payback period of 4.1 years with a net present value of -$400. Which projects should be accepted based on the payback decision rule?

1. either, but not both projects

2. Both Arcena and Bilbao

3. Neith Aracena nor Bilbao

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Answer #1

answer: Both Acrena and Bilbao.

The decision was based on payback rule as given in the question.

payback rule says to accept the project with low pay back and sets the maximum payback period

beyond which not acceptable. here maximum payback period is 5 years.

as the both the projects are independent, can accept both projects as they are within the required payback period.

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