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.