Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available. Year Cash Flow (A) Cash Flow (B) 0 –$ 75,000 –$ 125,000 1 33,000 29,000 2 36,000 32,000 3 19,000 35,000 4 9,000 240,000 a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. Which, if either, of the projects should the company accept?

Firstly, let recall the nature of paypack period. Paypack period is the duration of time it take to recover initial investment in a project. Please note that paypack period concept does not take time value of money into consideration.

Let look at project A: Initial investment = 75,000. Cummulative cashflow until year 2 is 33,000 + 36,000 = 69,000. So, now we know that the paypack period is "2 year + something" or

Paypack period for project A = 2 + (75,000 - 69,000)/19,000 = 2.32 year.

Let look at project B: Initial investment = 125,000. Cummulative cashflow until year 3 is 29,000 + 32,000 + 35,000 = 96,000. So, now we know that the paypack period is "3 year + something" or

Paypack period for project B = 3 + (125,000 - 96,000)/240,000 = 3.12 year.

Because Stenson, Inc., imposes a payback cutoff of 3 years, the company should accept project A.