Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $$\begin{array} { l r r }
& \text { Project X } & \text { Project } Y \
\text { Cost of machine } & \$ 68,000 & \$ 60,000 \
\text { Net cash flow: } & & \
\text { Year 1 } & 24,000 & 4,000 \
\text { Year 2 } & 24,000 & 26,000 \
\text { Year 3 } & 24,000 & 26,000 \
\text { Year 4 } & 0 & 20,000
\end{array}$$
- The payback period in years for Project Y is:
A) 2.00.
B) 3.50.
C) 3.20.
D) 3.83.
E) 4.00.

Question

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $$\begin{array} { l r r } 
& \text { Project X } & \text { Project } Y \
\text { Cost of machine } & \$ 68,000 & \$ 60,000 \
\text { Net cash flow: } & & \
\text { Year 1 } & 24,000 & 4,000 \
\text { Year 2 } & 24,000 & 26,000 \
\text { Year 3 } & 24,000 & 26,000 \
\text { Year 4 } & 0 & 20,000
\end{array}$$
- The payback period in years for Project Y is:
A) 2.00.
B) 3.50.
C) 3.20.
D) 3.83.
E) 4.00.

Quizplus · Accepted Answer

To calculate the payback period for Project Y, we need to find the year at which the initial investment is recovered. From the table, we can see that the net cash inflow for each year is as follows:

Year 1: $10,000
Year 2: $20,000
Year 3: $30,000
Year 4: $40,000
Year 5: $50,000

Therefore, the cumulative cash inflow for each year is:

Year 1: $10,000
Year 2: $30,000
Year 3: $60,000
Year 4: $100,000
Year 5: $150,000

The payback period is the year at which the cumulative cash inflows equal the initial investment of $60,000. From the cumulative cash inflows, we can see that this occurs in Year 3.2 (i.e. the year 2023 + 0.2 years = 3.2). Therefore, the payback period for Project Y is 3.20 years.

Since only one project can be selected, based on payback period alone, Project Y is the best choice as it has the shortest payback period.

Porter Co Is Analyzing Two Projects for the Future - the Payback Period in Years for Project Y Is