Chapter 10 (Part 1): PAYBACK PERIOD and DISCOUNTED PAYBACK PERIOD

10-1

• The Tiger Co. is considering an expansion of its product line and has estimated the following cash flows associated with such an expansion.
• The initial cash outflow would be $1,950,000 and the project would generate cash inflows of $450,000 per year for 6 years.
• The required rate of return is 9%.

1. Calculate the projects Payback Period. Should the project be accepted or rejected? Explain.
2. Calculate the projects Discounted Payback Period. Should the project be accepted or rejected? Explain.

10-2

• The Elephant Co. is considering a project with initial cash outlay of $80,000 and expected cash flows of $20,000 at the end of each year for 6 years.
• The required rate of return for this project is 10%.

1. Calculate the projects Payback Period. Should the project be accepted or rejected? Explain.
2. Calculate the projects Discounted Payback Period. Should the project be accepted or rejected? Explain.

10-3

• The Lion Co. is considering two independent projects: A and B.
• The required rate of return on both projects is 11%.
• The expected annual cash inflows from each project are as follows:

	Project A	Project B
Initial outlay, Year 0	-$50,000	-$70,000
Inflow, Year 1	$12,000	$13,000
Inflow, Year 2	$12,000	$13,000
Inflow, Year 3	$12,000	$13,000
Inflow, Year 4	$12,000	$13,000
Inflow, Year 5	$12,000	$13,000
Inflow, Year 6	$12,000	$13,000

1. Calculate the Payback Period for each project. Which project(s) should be accepted? Explain.

• Project A:
• Project B:

2. Calculate the Discounted Payback Period for each project. Which project(s) should be accepted? Explain.

• Project A:
• Project B:

10-4

• The Fox Co. is considering three projects: A, B and C.

	Project A	Project B	Project C
Initial outlay, Year 0	-$1,000	-$10,000	-$5,000
Inflow, Year 1	$600	$5,000	$1,000
Inflow, Year 2	$300	$3,000	$1,000
Inflow, Year 3	$200	$3,000	$2,000
Inflow, Year 4	$100	$3,000	$2,000
Inflow, Year 5	$500	$3,000	$2,000

1. Calculate the Payback Period for each project.

• Project A:
• Project B:
• Project C:

2. If these projects are independent, and you require a 3-year payback before an investment can be accepted, which project(s) will you go ahead with? Explain.
3. If these projects are mutually exclusive, and you require a 3-year payback before an investment can be accepted, which project(s) will you go ahead with? Explain.