Calculate the Payback Period for Each of the Following Projects

question 62

Essay

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_A:
years
Payback_B:

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Definitions:

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