Consider the following two mutually exclusive projects, each of which require an initial investment of Tk. 100,000 and have no salvage value. This organization, which has a cost of capital of 15%, must choose one or the other.

Year	Project A	Project B
1	Tk. 10,000	20,000
2	20,000	40,000
3	30,000	30,000
4	40,000	20,000
5	50,000	10,000

Compute the payback period of these two projects. Using the payback. criterion, which project is more desirable?

উত্তরঃ

Project A: Payback Period Calculation

Initial Investment = Tk. 100,000

    

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Year	Cash Flow (Tk.)	Cumulative Cash Flow (Tk.)
1	10,000	10,000
2	20,000	10,000 + 20,000 = 30,000
3	30,000	30,000 + 30,000 = 60,000
4	40,000	60,000 + 40,000 = 100,000
5	50,000	100,000 + 50,000 = 150,000

From the table, the cumulative cash flow reaches Tk. 100,000 at the end of Year 4.

Therefore, Payback Period for Project A = 4 years.

Project B: Payback Period Calculation

Initial Investment = Tk. 100,000

    

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Year	Cash Flow (Tk.)	Cumulative Cash Flow (Tk.)
1	20,000	20,000
2	40,000	20,000 + 40,000 = 60,000
3	30,000	60,000 + 30,000 = 90,000
4	20,000	90,000 + 20,000 = 110,000
5	10,000	110,000 + 10,000 = 120,000

At the end of Year 3, the cumulative cash flow is Tk. 90,000. The remaining amount to be recovered is:

Remaining Investment = Initial Investment - Cumulative Cash Flow at Year 3

Remaining Investment = Tk. 100,000 - Tk. 90,000 = Tk. 10,000

The cash flow in Year 4 is Tk. 20,000.

Fraction of Year 4 required to recover the remaining investment = Remaining Investment / Cash Flow in Year 4

Fraction = \( \frac{10,000}{20,000} = 0.5 \) years

Therefore, Payback Period for Project B = 3 years + 0.5 years = 3.5 years.

Conclusion: Desirability using Payback Criterion

Payback Period for Project A = 4 years

Payback Period for Project B = 3.5 years

According to the payback period criterion, the project with the shorter payback period is considered more desirable because it recovers the initial investment faster, thus reducing risk. In this case, Project B has a shorter payback period (3.5 years) compared to Project A (4 years).

Therefore, using the payback criterion, Project B is more desirable.