Answer:
Project A = 2.2 yeas
Project B = 3.06 years
Explanation:
In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:
For Project A:
In year 0 = $51,000
In year 1 = $20,000
In year 2 = $26,600
In year 3 = $22,000
In year 4 = $8,000
If we sum the first 2 year cash inflows than it would be $46,600
Now we deduct the $46,600 from the $51,000, so the amount would be $4,400 as if we added the third year cash inflow so the total amount exceed to the initial investment. So, we deduct it
And, the next year cash inflow is $22,000
So, the payback period equal to
= 2 years + $4,400 ÷ $22,000
= 2.2 yeas
In 2.2 yeas, the invested amount is recovered for project A
For Project B:
In year 0 = $96,000
In year 1 = $22,000
In year 2 = $27,000
In year 3 = $32,000
In year 4 = $244,000
If we sum the first 3 year cash inflows than it would be $81,000
Now we deduct the $71,000 from the $96,000, so the amount would be $15,000 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it
And, the next year cash inflow is $244,000
So, the payback period equal to
= 3 years + $15,000 ÷ $244,000
= 3.06 yeas
In 3.06 yeas, the invested amount is recovered for project B
