Q1) ABC Company is thinking of two long-term investment proposals. Initial outlay for Project L is $75,000, salvage value for project is $25,000, and expected after tax cash returns (including salvage value) are given below throughout its expected 4 year useful life. Project M, if chosen will have to be replaced after 5 years and cost $95,000. It will have no salvage value. Its expected cash inflows are also given below.
YEAR
|
PROJECT L
|
PROJECT M
|
1
|
$25,000
|
31,000
|
2
|
30,000
|
35,000
|
3
|
25,000
|
40,000
|
4
|
30,000
|
23,000
|
5
|
|
15,000
|
Determine payback period (to nearest tenth of a year) for each project? Using payback method as selection criteria, which project would you choose?