Question

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?
A.) Project A onlyB.) Project B onlyC.) Both A and BD.) Neither A nor BE.) Either, but not both projects

Answer 1

Answer:

A.) Project A only

Explanation:

Even though project B has a significant higher net present value, it should not be accepted since it fails to meet the maximum payback period criteria set by the company. On the other hand, project A meets that criteria and since there are no other parameters being used to check the projects' viability, project A should be the only one accepted.