AC 49 - Question Answer The question has asked for the...

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Question: Answer: The question has asked for the payback period and not the discounted payback period. So, we would be calculating payback period. Payback period is th eperiod in which the project's initial cash outflows get recovered. Payback Period = A + B C Where, In the above formula, A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Years AA Cumulative 0 -22000 -22000 1 7000 -15000 2 9000 -6000 3 15000 9000 So, payback period = 2 + |-6,000| / 15,000 = 2.40 Years. So, this is not acceptable.
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Unformatted text preview: Years BB Cumulative-22000-22000 1 9500-12500 2 9500-3000 3 9500 6500 Payback period = 2 + |-3,000| / 9,500 = 2.32 Years. So, this is also not acceptable. Years CC Cumulative-22000-22000 1 13000-9000 2 10000 1000 3 9000 10000 Payback period = 1 + |-9,000| / 10,000 = 1.90 Years. So, this is within 2 years and so it is acceptable. So, payback project CC with payback period of 1.90 Years is the correct option. If discounted payback period is required, use the same formula on the discounted cash flows in place of gross cash flows....
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  • Spring '15
  • Accounting, PAYBACK PERIOD, 2 years, 1.90 Years, 2.32 Years, 2.40 Years

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