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Two new software projects are proposed to a young, start-up company. The Alpha project will cost...

Two new software projects are proposed to a young, start-up company. The Alpha project will cost $225,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $165,000 to develop and is expected to have annual net cash flow of $30,000. The company is very concerned about their cash flow. Calculate the payback period for each project. Which project is better from a cash flow standpoint? (Round your answers to 2 decimal places.)

The payback period for project Alpha____ years.

The payback period for project Beta___years.

The better project is___.

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Answer #1

The payback period for project Alpha 5.63 years.

The payback period for project Beta 5.50years.

The better project is Beta

Notes:

Payback Period for Alpha = Initial Investment / Annual Cash Flows

= $ 225,000/ $ 40,000

= 5.625 years

= 5.63 years

Payback Period for Beta = Initial Investment / Annual Cash Flows

= $ 165,000 / $ 30,000

= 5.50 years

The better project would be the one with the lower payback period. Hence, the better project is Project Beta

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