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
Related questions
Question
Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows:
What is project A's payback period?
Transcribed Image Text:The table compares cash flows for Project A and Project B over a period of eight years. Each row corresponds to a particular year, starting from Year 0 to Year 7.
- **Year 0**:
- Project A: ($300)
- Project B: ($405)
- Both projects have initial negative cash flows, indicating an initial investment or cost.
- **Year 1**:
- Project A: ($387)
- Project B: 134
- **Year 2**:
- Project A: ($193)
- Project B: 134
- **Year 3**:
- Project A: 100
- Project B: 234
- **Year 4**:
- Project A: 600
- Project B: 134
- **Year 5**:
- Project A: 600
- Project B: 134
- **Year 6**:
- Project A: 650
- Project B: 134
- **Year 7**:
- Project A: 50
- Project B: 0
### Observations:
- Project A shows negative cash flows in the first three years, indicating continuing costs or losses before turning positive in Year 3.
- Project B has a high initial cost in Year 0 but generates a steady cash flow of 134 for most of the following years, with a peak in Year 3.
- Both projects show cash flow trends that could indicate the profitability and timeline for returns on investment, which can be crucial for decision-making.
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