Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?
A) Project A only
B) Project B only
C) Both A and B
D) Neither A nor B
E) Either, but not both projects

Question

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? 
A) Project A only 
B) Project B only 
C) Both A and B 
D) Neither A nor B 
E) Either, but not both projects

Quizplus · Accepted Answer

According to the payback decision rule, a project should be accepted if its payback period is less than the required payback period. In this case, Project A has a payback period of 2.9 years, which is less than the required payback period of 3 years. Therefore, Project A should be accepted. Project B has a payback period of 3.1 years, which is greater than the required payback period. Therefore, Project B should be rejected.

Samuelson Electronics Has a Required Payback Period of Three Years