3 Calculating Payback Global Toys Inc imposes a payback cuto

3. Calculating Payback. Global Toys Inc. imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Cash Flow (B) -$105,000 21,000 26,000 29,000 260,000 Year Cash Flow (A) -$60,000 23,000 28,000 19,000 9,000 0 3 4

Solution

Payback period is the time upto which initial cost is recovered back. Payback perios of both project is calculated as follows: Project A Project B Years Cash flow Cumulative cash flow Cash flow Cumulative cash flow 0 $          -60,000              -60,000         -1,05,000           -1,05,000                         1                23,000              -37,000              21,000               -84,000                         2                28,000                 -9,000              26,000               -58,000                         3                19,000                10,000              29,000               -29,000                         4                   9,000                19,000           2,60,000             2,31,000 Pyaback Period = 2+(9000/19000) Pyaback Period = 3+(29000/260000) =                     2.47 Years =           3.11 Years Project A should be accepted because payback period is within cutoff of 3 years.