# SMU MBA ASSIGNMENTS

## Solve the below given problem: Given below are the details on the cash flows of two projects A and B. Compute payback period for A and B.

December 02, 2017 By: Meliza Category: 1st SEM

1. Solve the below given problem: Given below are the details on the cash flows of two projects A and B. Compute payback period for A and B.

Cash flows of A and B

 Year Project A cash flows (Rs.) Project B cash flows (Rs.) 0 (4,00,000) (5,00,000) 1 2,00,000 1,00,000 2 1,75,000 2,00,000 3 25,000 3,00,000 4 2,00,000 4,00,000 5 1,50,000 2,00,000

Solution for the problem

Problem:

 Solution Table 8.6 shows the cash flows and the cumulative cash flows of the projects A and B. Table 8.6 Cash Flows and Cumulative Cash Flows of A and B Year Project A Project B Cash flows (Rs.) Cumulative Cash flows Cash flows (Rs.) Cumulative Cash flows 1 2,00,000 2,00,000 1,00,000 1,00,000 2 1,75,000 3,75,000 2,00,000 3,00,000 3 25,000 4,00,000 3,00,000 6,00,000 4 2,00,000 6,00,000 4,00,000 10,00,000 5 1,50,000 7,50,000 2,00,000 12,00,000

From the cumulative cash flows column, project A recovers the initial cash outlay of Rs 4,00,000 at the end of the third year. Therefore, payback period of project A is 3 years.

From the cumulative cash flow  column  the  initial  cash  outlay  of Rs. 5,00,000 lies between 2nd year and 3rd year in case of project B.

Therefore, payback period for project B is:

2 + 5,00,000 3,00,000

3,00,000

= 2.67 years

Pay-back period for project B is 2.67 years