Suzanne's Cleaners is considering two projects with the following cash flow data. Based on payback periods,...

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Finance

Suzanne's Cleaners is considering two projects with thefollowing cash flow data. Based on payback periods, which projectis less risky based on liquidity risk?
PROJECT 1
Year
0
1
2
3
4
5
Cash flows
-$1,100
$300
$310
$320
$330
$340
PROJECT 2
Year
0
1
2
3
4
5
Cash flows
-$850
$100
$75
$500
$200
$275
A.
Project 1
B.
Project 2

Answer & Explanation Solved by verified expert

3.8 Ratings (714 Votes)

a.Project 1

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 3 years + 170/ 330

= 3 years + 0.52

= 3.52 years.

b.Project 2

Payback period= 3 years + 175/ 200

= 3 years + 0.88

= 3.8 years.

Project 1 is less risky based on liquidity risk since it has the shorter payback period.

In case of any query, kindly comment on the solution.

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Transcribed Image Text

Suzanne's Cleaners is considering two projects with thefollowing cash flow data. Based on payback periods, which projectis less risky based on liquidity risk?PROJECT 1Year012345Cash flows-$1,100$300$310$320$330$340PROJECT 2Year012345Cash flows-$850$100$75$500$200$275A.Project 1B.Project 2