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Calculate the Payback Period for Each of the Following Projects

Question 62

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Calculate the payback period for each of the following projects, then comment on the advisability of selection based on the payback period criterion in contrast to NPV: Project A has a cost of $15,000, returns $4,000 after-tax the first year and this amount increases by $1,000 annually over the five-year life; Project B costs $15,000 and returns $13,000 after-tax the first year, followed by four years of $2,000 per year.The firm uses a 10 percent discount rate.
B.So payback can seriously underestimate a Project's contribution to business wealth, as illustrated in its contrasting results to that of NPV.
PaybackA:
Calculate the payback period for each of the following projects, then comment on the advisability of selection based on the payback period criterion in contrast to NPV: Project A has a cost of $15,000, returns $4,000 after-tax the first year and this amount increases by $1,000 annually over the five-year life; Project B costs $15,000 and returns $13,000 after-tax the first year, followed by four years of $2,000 per year.The firm uses a 10 percent discount rate. B.So payback can seriously underestimate a Project's contribution to business wealth, as illustrated in its contrasting results to that of NPV. Payback<sub>A</sub>: years Payback<sub>B</sub>: years
PaybackB:
Calculate the payback period for each of the following projects, then comment on the advisability of selection based on the payback period criterion in contrast to NPV: Project A has a cost of $15,000, returns $4,000 after-tax the first year and this amount increases by $1,000 annually over the five-year life; Project B costs $15,000 and returns $13,000 after-tax the first year, followed by four years of $2,000 per year.The firm uses a 10 percent discount rate. B.So payback can seriously underestimate a Project's contribution to business wealth, as illustrated in its contrasting results to that of NPV. Payback<sub>A</sub>: years Payback<sub>B</sub>:

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Using payback period alone, project B lo...

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