This answer does not make sense since the cash flows stop after 14 years, so again, we must
conclude the payback period is never.
Buy Coastal, Inc., imposes a payback cutoff of 3 years for its international investment projects.
Suppose the company has the following two projects available. Project A has payback period of
years, while project B has a payback period of years. Therefore, it should accept project A and
reject project B.
(Round your answers to 3 decimal places. (e.g., 32.162))
Year
Cash Flow (A) Cash Flow (B)
0
−$42,000 −$54,000
1
24,000
9,000
2
35,000
15,000
3
15,000
25,000
4
2,000
261,000
Explanation:
Project A has cash flows of $24,000 in Year 1, so the cash flows are short by $18,000 of
recapturing the initial investment, so the payback for Project A is:
A: Payback = 1 + ($18,000 / $35,000) = 1.514 years
Project B has cash flows of:
Cash flows = $9,000 + $15,000 + $25,000 = $49,000
during the first three years. The cash flows are still short by $5,000 of recapturing the initial