Question: A company uses the payback method to evaluate capital budgeting projects. It is currently considering projects A, B and C. Project A Project B Project C Initial cost (cash outflow) $10,000 $10,000 $10,000 Cash inflows: 1st year $ 1,000 $10,000 $ 5,000 2nd year $ 9,000 $1,000 $ 5,000 3rd year $15,000 - 0 - $35,000
a) Find the payback period for each of the above capital budgeting projects. Label the payback period for each project so I can see which payback period goes with which project.
b) What two major weaknesses of the payback method are illustrated by this problem? Explain each.