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Buy Coastal, Inc., imposes a payback cutoff of 3 years for its international investment projects. Suppose...

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Finance

Buy Coastal, Inc., imposes a payback cutoff of 3 years for itsinternational investment projects. Suppose the company has thefollowing two projects available. Project A has payback period ofyears, while project B has a payback period of years. Therefore, itshould project A and project B. (Round your answers to 3 decimalplaces. (e.g., 32.162))

Year Cash Flow (A) Cash Flow (B)

0 ?$43,000 ?$59,000

1 21,000 10,000

2 31,000 16,000

3 10,000 26,000

4 2,000 268,000 References

Answer & Explanation Solved by verified expert
4.5 Ratings (679 Votes)

Project A
Year Cash flow stream Cumulative cash flow
0 -43000 -43000
1 21000 -22000
2 31000 9000
3 10000 19000
4 2000 21000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-22000))/(9000-(-22000))
1.71 Years
Accept project as payback period is less than 3 years
Project B
Year Cash flow stream Cumulative cash flow
0 -59000 -59000
1 10000 -49000
2 16000 -33000
3 26000 -7000
4 268000 261000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-7000))/(261000-(-7000))
3.03 Years
Reject project as payback period is more than 3 years

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Transcribed Image Text

Buy Coastal, Inc., imposes a payback cutoff of 3 years for itsinternational investment projects. Suppose the company has thefollowing two projects available. Project A has payback period ofyears, while project B has a payback period of years. Therefore, itshould project A and project B. (Round your answers to 3 decimalplaces. (e.g., 32.162))Year Cash Flow (A) Cash Flow (B)0 ?$43,000 ?$59,0001 21,000 10,0002 31,000 16,0003 10,000 26,0004 2,000 268,000 References

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