Answer:
Payback period
Project AA= 2 years 4.8 months
Project BB = 2 years 3.8 months
Project CC = 2 years 1.3 months
Explanation:
Project AA
Cash inflow for after 2 years = 7000 + 9000 =16000
Balance to recover initial cost = 22,000 -16000 = 6,000
Payback period
= 2 years + (6000/15000)× 12 months
= 2 years 4.8 months
Project BB
Cash inflow for after 2 years = 9500 +9500 =19,000
Balance to recover initial cost = 22,000 -19000 = 3,000
Payback period
= 2 years + (3000/9,500)× 12 months
= 2 years 3.8 months
Project CC
Cash inflow for after 2 years = 11,000 + 10,000 =21,000
Balance to recover initial cost = 22,000 -21,000 = 1,000
Payback period
= 2 years + (1,000/9,000)× 12 months
= 2 years 1.3 months
The payback of project AA is 2.4 years.
The payback of project BB is 2.3 years.
The payback of project CC is 2.1 years.
Payback calculates how long it take to recover the investment ina project from its cumulative cash flows.
Project AA
Amount recovered in year 1 = $-22,000 + $7,000 = $-15,000
Amount recovered in year 2 = $-15,000 + $9,000 = $-6,000
Amount recovered in year 3 = 6000 / 15,000 = 4 years
Payback = 2.4 years
Project BB
Payback period = $22,000 / $9,500 = 2.3 years
Project CC
Amount recovered in year 1 = $-22,000 + $11,000 = $11,000
Amount recovered in year 2 = $-11,000 +$10,000 = $-1000
Amount recovered in year 3 = $-1,000 / $9000 = 0.11
Payback period = 2.1 years
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