Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available. Year Cash Flow A Cash Flow B 0 –$ 48,000 –$ 93,000 1 18,500 20,500 2 24,800 25,500 3 20,500 33,500 4 6,500 247,000 What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e. g., 32.16.) Payback period Project A years Project B years Which, if either, project(s) should the company accept?

2.23 years ; 3.05 years ; Project A

Explanation:

The computation of the payback period for each project is as follows

For project A

In year 0 = $48,000

In year 1 = $18,500

In year 2 = $24,800

In year 3 = $20,500

In year 4 = $6,500

If we sum the first 2 year cash inflows than it would be $43,300

Now we subtract the $44,800 from the $48,000 , so the amount would be $4,700 as if we added the third year cash inflow so the total amount exceed to the initial investment. Hence, we deduct it

And, the next year cash inflow is $20,500

So, the payback period equal to

= 2 years + $4,700 ÷ $20,500

= 2.23 years

For project B

In year 0 = $93,000

In year 1 = $20,500

In year 2 = $25,500

In year 3 = $33,500

In year 4 = $247,000

If we sum the first 3 year cash inflows than it would be $79,500

Now we subtract the $44,800 from the $48,000 , so the amount is$13,500 as if we added the third year cash inflow so the total amount exceed to the initial investment. Therefore, we deduct it

And, the next year cash inflow is $247,000

So, the payback period equal to

= 3 years + $13,500 ÷ $247,000

= 3.05 years

As we can see that the project A has less payback period so the same is to be selected

1) the stages a new product goes through from beginning to end, i.e., the stages that a product passes through from introduction through growth, maturity, and decline. 2) the time from initial research and development to the time at which sales and support of the product to customers are withdrawn. 3) the period of time during which a product can be produced and marketed profitably.

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