Question

Canada Golf Club (CGC) is considering three independent projects for July 2021 tournament. The three projects are project A, project B and project C. Given the following cash flow information, calculate the payback period for each. If CGC requires a 3-year payback before an investment can be made, which project(s) would be accepted?

Year Project A ($) Project B ($) Project C ($)
0 (Investment) -1,000 -$10,000 -$5,000
1 600 4,000 2,000
2 300 3,000 1,000
3 200 2,000 2,000
4 100 2,000 1,000
5 500 4,000 2,000

Answer 1

$\bold {Answer}$

Project A and Project C are acceptable

$\bold {Solution}$

Calculation of Payback Periods

Project A payback period:

$= 2 \space years + \dfrac {\$100}{\$200}years$

= 2 years + 0.5 years

$=\bold{ 2.5 \space years }$

Project B payback period:

$= 3 \space years + \dfrac {\$1,000}{\$2,000} years$

= 3 years + 0.5 years

$=\bold{ 3.5 \space years }$

Project C payback period:

$= \bold {3 \space years}$

Decision

Projects A and C are acceptable. Project A has a payback that is less than 3 years, and project C has an exactly 3 year payback. Thus, they are both acceptable under the firm's decision criteria.