Project H requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000, $40,000, and $50,000. The projects are mutually exclusive. The company accepts projects with payback periods of 3 years or less.
A) Project H will be accepted.
B) Project T will be accepted.
C) H and T will both be accepted.
D) Neither projected will be accepted.

Question

Quizplus · Accepted Answer

The payback period for Project H is: 
Year 1: $50,000
Year 2: $40,000
Year 3: $30,000
Total cash inflows: $120,000
Payback period: 2 years and 6 months (or 2.5 years)

The payback period for Project T is: 
Year 1: $30,000
Year 2: $40,000
Year 3: $50,000
Total cash inflows: $120,000
Payback period: 3 years

Since the company accepts projects with payback periods of 3 years or less, only Project H will be accepted.

Project H Requires an Initial Investment of $100,000 and Produces