Porter co. is analyzing two projects for the future. assume that only one project can be selected. project x project y cost of machine $ 68,000 $ 60,000 net cash flow: year 1 24,000 4,000 year 2 24,000 26,000 year 3 24,000 26,000 year 4 0 20,000 if the company is using the payback period method and it requires a payback of three years or less, which project should be selected

Company should go for project A.

Explanation: Payback period can be defined as time period taken by a firm from its cash inflows, to recover its initial outflow in that investment. It can be shown as follow :-  

Project X :-

The company  requires a payback of three years or less, therefore select Project X whose payback is 2.833 years.

Explanation:

Payback is the number of years it will take for the company to recover the initial investment.

Project X      

Year  Cash-flow  Balance

0        (68,000)      (68,000)

1          24,000        (44,000)

2          24,000     (20,000)

3         24,000     4,000  

4         -                4,000  

For Project X, at the end of year 2, the company still needs to recover $20,000.  At the end of year 3, the project is reflecting a positive cumulative balance, implying that payback was reached some month after year 2.

Project Y      

Year  Cash-flow  Balance  

0        (60,000)   (60,000)

1          4,000     (56,000)

2         26,000     (30,000)

3         26,000     (4,000)

4         20,000     16,000