Page 362 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 14

Test your understanding 4

Year Project A Cumulative Project B Cumulative
cash flow cash flow

$000 $000 $000 $000

0 (450) (450) (450) (450)

1 200 (250) 50 (400)

2 150 (100) 120 (280)

3 100 0 190 (90)

4 50 310 220

5 20 260

Based purely on payback DER should undertake Project A as it pays back
with the required 3 years.

Note: Payback is useful when liquidity is a deciding factor; however, based
on total net cash flows Project B is more financially worthwhile

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