Mutually exclusive projects

Asked by maham237 @ 12/01/2021 in Business viewed by 259 People

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

Answered by maham237 @ 12/01/2021

Answer:

Choose Project A whose payback is 2.492 years and therefore falls within the 2.5 year required payback period.

Explanation:

Project A

Year Cash-flow Balance

0 (72,000) (72,000)

1 21,400 (50,600)

2 22,900 (27,700)

3 56,300 28,600

$Payback = YearsWithNegativeCumulativeCashflowBalance + \frac{-LastNegativeBalance}{CashInflowfollowingYear}
$

$= 2years + \frac{-(-27,700}{56300}=2.492 years$

Project B

Year Cash-flow Balance

0 (81,000) (81,000)

1 20,100 (60,900)

2 22,200 (38,700)

3 74,800 36,100

$Payback = YearsWithNegativeCumulativeCashflowBalance + \frac{-LastNegativeBalance}{CashInflowfollowingYear}
$

$= 2years + \frac{-(-38,700}{74,800}=2.517 years$

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Mutually exclusive projects

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