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Caledonia Products Integrative Problem

1. What is each project’s payback period?

Payback Period is the length of time required to recover the cost of an investment. This method is use to evaluate a capital investment proposal.

Project A payback period = (3.12) 4 years

Project A would be fully paid for in Year Four, when total net revenue surpasses the initial cost of $100,000

Project B payback period = 5 years

Project A would be fully paid for in Year Five, when total net revenue surpasses the initial cost of $100,000

|YEAR |PROJECT A |CUMULATIVE CASH INFLOWS |

|0 |–$100,000 | |

|1 |32,000 |32,000 |

|2 |32,000 |64,000 |

|3 |32,000 |96,000 |

|4 |32,000 |128,000 |

|5 |32,000 |$160,000 |

|YEAR |PROJECT B |CUMULATIVE CASH INFLOWS |

|0 |–$100,000 | |

|1 |0 |0 |

|2 |0 |0 |

|3 |0 |0 |

|4 |0 |0 |

|5 |$200,000 |$200,000 |

Formula used to calculate Payback Period

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Here is the step by step to get Payback Period

1) We add up the cash inflows beginning after the initial cash ($100,000) in the cumulative cash inflows column

2) We keep an eye on this...