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
A) 20 years.
B) 10 years.
C) 5 years.
D) 4 years.

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
A) 20 years. 
B) 10 years. 
C) 5 years. 
D) 4 years.

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