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Two new wind-farm tower projects are proposed for a small company that installs them in south western Wisconsin. Project A will cost $250,000 to complete and is expected to have an annual net cash flow of $75,000. Project B will cost $150,000 to complete and should generate annual net cash flows of $52,000. As a small company, the owner and senior management team are very concerned about their cash flow. Use the payback period method and determine which project is better from a cash flow standpoint. Can someone show me how I can help my son solve this problem so I can guide him through it?

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marcthemathtutor

Answer:

Step-by-step explanation:

The simplified formula for payback period (assuming even cashflow) is as follows:

Payback Period (in years) = Cost / cashflow per year

Generally, the choice which gives the shorter payback period is desired

For project A,

Cost = $250,000 and  cashflow per year = $75,000

Payback Period for project A

= 250,000 ÷ 75,000 = 3.333 years

For Project B

Cost = $150,000 and  cashflow per year = $52,000

Payback Period for project B

= 150,000 ÷ 52,000 = 2.88 years

comparing the PP for A & B, it is clear that B has the shorter payback period, and hence choice B is more desirable

srastiuts023

The simplified formula for the payback period (assuming even cashflow) is as follows:

Payback Period (in years) = Cost / cashflow per year

Generally, the choice which gives the shorter payback period is desired

For project A,

Cost = $250,000 and  cashflow per year = $75,000

Payback Period for project A

= 250,000 ÷ 75,000 = 3.333 years

For Project B

Cost = $150,000 and  cashflow per year = $52,000

Payback Period for project B

= 150,000 ÷ 52,000 = 2.88 years

comparing the PP for A & B, it is clear that B has the shorter payback period, and hence choice B is more desirable

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