Payback period Question

Submitted by Nabs on Sun, 06/01/2014 - 08:48

you are the project manager at Day-old Donuts, rapidly growing franchise selling premium donuts at a discount. Currently your company on opening additional stores through the United States. your primary market includes densely- populated, major metropolitan cities. Your company is evaluating different cities for expansion, including new your San Francisco, Los Angeles.
Based on the following data which project should be recommended?

Project New York- initial cost of $250,000. First year cash flow- $50,000. $25,000 cash flow per quarter after.

Project Los Angeles- initial Cost of $200,000. First year cash flow- $50,000. $12,5000 cash flow per quarter after.

Project San Francisco- Payback period of 36 months.
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A) Either Project New York or Project San Francisco since the payback period are same.

B) Project San Francisco since it has the shortest payback period

C) Either project Los Angeles or Project San Francisco since the payback period are same.

D) Project New York since it has the shortest payback period.

Correct Answer is A. can anyone please explain how.

Many Thanks.

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admin

Mon, 06/02/2014 - 01:52

New York get 50K in 12 months and in remaining 24 months which is 8 quarters they will get $200K . So in 36 months it would be $250L which is equal to initial cost of the project. Hence the payback period is 36 months.

Nabs

Mon, 06/02/2014 - 10:45

understood..thank you admin.

signor_rk

Sun, 08/10/2014 - 11:36

I have seen this Question in Certgear Simulation.For the cash flow part of Project Los Angeles , there is is typing mistake , which should be $12,500.
So considering this the Projects have Payback periods as follows:
NY has a Payback period of 3 years.($50,000+$100,000+$100,000)
LS has a Payback period of 5 years.($50,000+$50,000+$50,000+$50,000+$50,000)
SF has a Payback period of 36 months , i.e., 3 Years too.
So , the option #(A) is the correct answer.