## Sunday, 3 August 2014

### Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.

Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.

 Year Cash Flow A Cash Flow B 0 –\$ 62,000 –\$ 107,000 1 25,500 27,500 2 33,200 32,500 3 27,500 26,500 4 13,500 233,000

 Requirement 1: What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

 Payback period Project A years Project B years

 Requirement 2: Should it accept either of them? Accept project A and reject project B

Explanation: 1:
 Project A has cash flows of: Cash flows = \$25,500 + 33,200 Cash flows = \$58,700 during the first two years. The cash flows are still short by \$3,300 of recapturing the initial investment, so the payback for Project A is: Payback = 2 + (\$3,300 / \$27,500) Payback = 2.12 years Project B has cash flows of: Cash flows = \$27,500 + 32,500 + 26,500 Cash flows = \$86,500 during the first three years. The cash flows are still short by \$20,500 of recapturing the initial investment, so the payback for Project B is: Payback = 3 + (\$20,500 / \$233,000) Payback = 3.09 years 2: Using the payback criterion and a cutoff of 3 years, accept project A and reject project B.