### Project Analysis: Payback Period MethodMadson's is evaluating two potential projects, labeled Project X and Project Y, for future investment. Assume that only one project can be selected. The cost of the machine for both projects is $30,000. The net cash flows for each project over a period of five years are as follows:#### Project X- **Cost of Machine**: $30,000- **Net Cash Flows**: - Year 1: $12,000 - Year 2: $12,000 - Year 3: $12,000 - Year 4: $0 - Year 5: $0#### Project Y- **Cost of Machine**: $30,000- **Net Cash Flows**: - Year 1: $2,000 - Year 2: $13,000 - Year 3: $13,000 - Year 4: $10,000 - Year 5: $0#### Payback Period AnalysisIf the company is using the payback period method and requires a payback within three years or less, the selection will be based on which project recovers its initial investment within that time frame (ignoring taxes).To determine the payback period:- **Project X**: - Year 1: $12,000 - Year 2: $12,000 - Year 3: $12,000 - **Cumulative Cash Flow at end of Year 3**: $36,000 Project X recovers its initial investment of $30,000 within three years. - **Project Y**: - Year 1: $2,000 - Year 2: $13,000 - Year 3: $13,000 - **Cumulative Cash Flow at end of Year 3**: $28,000 - Year 4: $10,000 - **Cumulative Cash Flow at end of Year 4**: $38,000 Project Y does not recover its initial investment of $30,000 within three years, but it does by Year 4.Based on the payback period method, which project should be selected? (Ignore taxes.)- A. Project X- B. Project Y

Payback period is the time required to recover the investment.

28. Madson's is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of $30,000 $30,000 Machine Net Cash Flow Year 1 12,000 2,000 Year 2 12,000 12,000 13,000 13,000 Year 3 Year 4 10,000 Year 5 If the company is using the payback period method and requires payback within three years or less, which project should be selected? (Ignore taxes.) A. Project X B. Project Y C. Either Project X or Y is acceptable D. Neither Project X nor Y is acceptable

28. Madson's is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of $30,000 $30,000 Machine Net Cash Flow Year 1 12,000 2,000 Year 2 12,000 12,000 13,000 13,000 Year 3 Year 4 10,000 Year 5 If the company is using the payback period method and requires payback within three years or less, which project should be selected? (Ignore taxes.) A. Project X B. Project Y C. Either Project X or Y is acceptable D. Neither Project X nor Y is acceptable

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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