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Bronco, Inc., imposes a payback cutoff of three years for its international investment projects. Year Cash Flow (A) Cash Flow (B) 0 â€"$ 62,000 â€"$ 72,000 1 24,000 16,000 2 30,000 19,000 3 22,000 28,000 4 9,000 232,000 What is the payback period for both projects?

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Answer:

Explanation:

For Project A,

Year            Cash Flow (A)           Cumulative Cash flow

0                 -62,000                                 -62,000

1                   24,000                                  -38,000

2                  30,000                                    -8,000

3                  22,000                                    14,000

4                    9,000                                    23,000

Payback period (PBP) for Project (A) = Last year with negative cumulative cash flow + (Absolute value of last year's negative cumulative cash flows/the cash flow of the following year of negative cumulative cash flows)

PBP = 2 + (8,000/22,000) years

PBP = 2.36 years

Therefore, the payback period for project A is 2.36 years

For Project B,

Year            Cash Flow (B)           Cumulative Cash flow

0                 -72,000                                 -72,000

1                   16,000                                  -56,000

2                  19,000                                  -37,000

3                  28,000                                   -9,000

4                232,000                                223,000

Payback period (PBP) for project (B) = Last year with negative cumulative cash flow + (Absolute value of last year's negative cumulative cash flows/the cash flow of the following year of negative cumulative cash flows)

PBP = 4 + (9,000/223,000) years

PBP = 4.04 years

Therefore, the payback period for project B is 4.04 years

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