Credo Corp 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 years ((50,000-30,000-25,000)/15,000 = 2). The payback period for Ess is 2.4 years ((60,000/25,000) = 2.4). Since Ell has a shorter payback period, it will be ranked higher than Ess. Note that statement A is true, but it does not affect the ranking of these two projects.

Credo Corp Requires an Initial Investment of $50,000 and the Produces