Project Ell requires an initial investment of $50,000 and the produces annual cash flows of $30,000, $25,000, and $15,000. Project Ess requires an initial investment of $60,000 and then produces annual cash flows of $25,000 per year for the next ten years. The company ranks projects by their payback periods.
A) Projects with unequal lives cannot be ranked using the payback method.
B) Ess will be ranked higher than Ell.
C) Ell and Ess will be ranked equally.
D) Ell will be ranked higher than Ess.

Question

Quizplus · Accepted Answer

The payback period for Ell is 2.33 years ($50,000 initial investment ÷ $21,666 cash inflow per year). 
The payback period for Ess is 2.4 years ($60,000 initial investment ÷ $25,000 cash inflow per year). 
Since Ell has a shorter payback period, it will be ranked higher than Ess using the payback method. Therefore, the best answer is D.

Project Ell Requires an Initial Investment of $50,000 and the Produces