Suppose a company's payback period cutoff is two years. Which of these two projects should be chosen? Project A: Year 0 -> -$20,000 ; Year 1 -> $13,200; Year 2 -> $8,300; Year 3 -> $3,200 Project B: Year 0 -> -$24,000; Year 1 -> $14,100; Year 2 -> $9,800; Year 3 -> $7,600 The solution uses the following equations: for Project A : 1+(Initial Investment - Year 1)/Year 2 or 1+(20,000 - 13,200)/8300 = 1.81 years for Project B: 2+(Initial Investment - Year 1 - Year 2)/Year 3 or 2+(24,000 - 14,100 - 9,800)/7,600 = 2.01 years The question is if we are evaluating both project A and B on the same timeline, why do we have two different equations?

Suppose a company's payback period cutoff is two years. Which of these two projects should be chosen? Project A: Year 0 -> -$20,000 ; Year 1 -> $13,200; Year 2 -> $8,300; Year 3 -> $3,200 Project B: Year 0 -> -$24,000; Year 1 -> $14,100; Year 2 -> $9,800; Year 3 -> $7,600 The solution uses the following equations: for Project A : 1+(Initial Investment - Year 1)/Year 2 or 1+(20,000 - 13,200)/8300 = 1.81 years for Project B: 2+(Initial Investment - Year 1 - Year 2)/Year 3 or 2+(24,000 - 14,100 - 9,800)/7,600 = 2.01 years The question is if we are evaluating both project A and B on the same timeline, why do we have two different equations?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter9: Capital Budgeting Techniques

Section: Chapter Questions

Problem 11PROB

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Question

The question is:

Suppose a company's payback period cutoff is two years. Which of these two projects should be chosen?

Project A: Year 0 -> -$20,000 ; Year 1 -> $13,200; Year 2 -> $8,300; Year 3 -> $3,200

Project B: Year 0 -> -$24,000; Year 1 -> $14,100; Year 2 -> $9,800; Year 3 -> $7,600

The solution uses the following equations:

for Project A : 1+(Initial Investment - Year 1)/Year 2 or 1+(20,000 - 13,200)/8300 = 1.81 years

for Project B: 2+(Initial Investment - Year 1 - Year 2)/Year 3 or 2+(24,000 - 14,100 - 9,800)/7,600 = 2.01 years

The question is if we are evaluating both project A and B on the same timeline, why do we have two different equations?

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