Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Question

Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected.  If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Quizplus · Accepted Answer

According to the payback period method, the project with the shortest payback period should be selected. Based on the information given, Project X has a payback period of 3 years (initial investment of $60,000 / annual net cash flow of $20,000), which meets the company's requirement. Project Y has a payback period of 4 years (initial investment of $80,000 / annual net cash flow of $20,000), which is longer than the company's requirement. Therefore, Project X should be selected under the payback period method.

Coffer Co Is Analyzing Two Projects for the Future