Suppose that a company is considering two different and mutually exclusive projects (A and B), where both have a five-year life and require an investment of $84,000. The cash flow patterns for each project are given below.

Project A: Even cash flows of $28,000 per year.

Project B: $48,000, $40,000, $36,000, $20,000, and $12,000.

Required:

1. Calculate the payback period for Project A:

Payback period = fill in the blank a188d202206801c_1 3.0 years

2. Calculate the payback period for Project B by completing the following table. Round payback period to one decimal place.

Year Unrecovered Investment (beginning of year) Annual Cash Flow Time Needed for Payback 1 $fill in the blank a188d202206801c_2 84,000 $fill in the blank a188d202206801c_3 48,000 fill in the blank a188d202206801c_4 1.0 year 2 fill in the blank a188d202206801c_5 36,000 fill in the blank a188d202206801c_6 40,000 fill in the blank a188d202206801c_7 0.9 year* Thus, the payback for Project B is fill in the blank a188d202206801c_8 1.9 years and is shorter than payback for Project A; thus Project B is less risky and has less impact on liquidity.

3. Now assume that a third project, Project C becomes available with the same investment outlay and the following annual cash flows (projects, A, B, and C are mutually exclusive):

Project C: $66,000, $20,000, $50,000, $50,000, $50,000

a. Calculate the payback for Project C (round to one decimal place): fill in the blank a188d202206801c_12 2.7 years.

b. Project C has the same payback as Project B but should be preferred over Project B for two reasons. First, Project C provides $fill in the blank a188d202206801c_13 more for the years beyond the payback period than Project B. Second, Project C returns $fill in the blank a188d202206801c_14 in the first year, while Project B returns only $fill in the blank a188d202206801c_15 . The extra $fill in the blank a188d202206801c_16 that Project B returns in the first year could be put to productive use, such as investing in another project. The payback period thus ignores the time value of money.