Fehr Company is considering two capital investment proposals. Estimates regarding each project are provided below: The company requires a 10% rate of return on all new investments.
The cash payback period for Project Blue is

Question

Fehr Company is considering two capital investment proposals. Estimates regarding each project are provided below:  The company requires a 10% rate of return on all new investments. 
The cash payback period for Project Blue is

Quizplus · Accepted Answer

The cash payback period for Project Blue is calculated as follows:
Initial investment = $50,000
Annual cash inflow = $15,000
Cash payback period = Initial investment ÷ Annual cash inflow = $50,000 ÷ $15,000 = 3.33 years
Since the cash payback period for Project Blue is less than the required 10% rate of return, it is a good investment. Project Red is not a good investment as its NPV is negative. Therefore, the best choice is to invest in Project Blue.

Fehr Company Is Considering Two Capital Investment Proposals