Stenson, 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 –$48,000 –$ 93,000
1 18,500 20,500
2 24,800 25,500
3 20,500 33,500
4 6,500 247,000
What is the payback period for each project?

Project A 2.22 years

Project B 3.05 years

Explanation:

Calculation for the payback period for each project

Project A

First step is to calculate for the amount received in 2 years

Amount received=$18,500+24,800

Amount received =$43,300

Second step is to calculate for the amount not received

Amount not received =$48,000-$43,300

Amount not received =$4,700

Third step is to find out when the remaining amount will be received.

=$4,700/$20,500

=$0.22 years

Last step

Payback period=2+0.22 years

Payback period =2.22 years

The payback period for project A will be 2.22 years

Project B

First step is to calculate for the amount received in 3 years

Amount received=$20,500+$25,500+$33,500

Amount received =$79,500

Second step is to calculate for the amount not received

Amount not received =$93,000-$79,500

Amount not received =$13,500

Third step is to find out when the remaining amount will be received.

=$13,500/$247,000

=$0.05 years

Last step

Payback period=3+0.05 years

Payback period =3.05years

The payback period for project B will be 3.05 years

answer; normative economics;