X-treme Vitamin Company is considering two investments, both of which cost $22,000. The cash flows are as follows: Year Project A Project B
1 $25,000 $22,000
2 12,000 11,000
3 8,000 14,000
Calculate the payback period for Project A and Project B.

0.88 years

1 year

Explanation:

Payback period calculates the amount of the time it takes to recover the amount invested in a project from its cumulative cash flows.

For project A:

Amount invested = $-22,000

Amount recovered in year 1 = $-22,000 + $25,000 =$-3000

The amount invested is recovered In 22,000 / $25,000 = 0.88 years

For project B:

Amount invested = $-22,000

Amount recovered in year 1 = $-22,000 + $22,000 = 0

The amount invested is recovered in a year

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