Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available. Cash Flow(A) -$ 54,000 21,500 28,400 23,500 9,500 Cash Flow(B) -$ 99,000 23,500 28,500 30,500 241.000 Year What is the payback period for each project? Project A years Project B years Which, if either, project(s) should the company accept? -234
Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available. Cash Flow(A) -$ 54,000 21,500 28,400 23,500 9,500 Cash Flow(B) -$ 99,000 23,500 28,500 30,500 241.000 Year What is the payback period for each project? Project A years Project B years Which, if either, project(s) should the company accept? -234
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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### Project Payback Period Evaluation for Stenson, Inc.
Stenson, Inc. imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.
#### Projects' Cash Flow Overview
| **Year** | **Cash Flow (A)** | **Cash Flow (B)** |
|:-------:|:-----------------:|:-----------------:|
| 0 | -$54,000 | -$99,000 |
| 1 | $21,500 | $23,500 |
| 2 | $28,400 | $28,500 |
| 3 | $23,500 | $30,500 |
| 4 | $9,500 | $241,000 |
### Payback Period Calculation
**What is the payback period for each project?**
**Project A:**
The payback period is calculated by summing the cash flows until the initial investment is recovered.
1. Initial Investment at Year 0: -$54,000
2. Cash Flow in Year 1: +$21,500
3. Cash Flow in Year 2: +$28,400
4. Cash Flow in Year 3: +$23,500
**Cumulative Cash Flow:**
| **Year** | **Cumulative Cash Flow (A)** |
|:-------:|:----------------------------:|
| 0 | -$54,000 |
| 1 | -$32,500 |
| 2 | -$4,100 |
| 3 | +$19,400 |
The payback period for Project A is slightly less than 3 years (since the cumulative cash flow becomes positive during the third year).
**Project B:**
1. Initial Investment at Year 0: -$99,000
2. Cash Flow in Year 1: +$23,500
3. Cash Flow in Year 2: +$28,500
4. Cash Flow in Year 3: +$30,500
**Cumulative Cash Flow:**
| **Year** | **Cumulative Cash Flow (B)** |
|:-------:|:-----------------------------:|
| 0 | -$99,000 |
| 1 | -$75,500 |
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