A company produces two boat models, Flyer and Skimmer. Both products are being considered for major investment projects next year. Relevant data follow: Flyer SkimmerNew investment $424,000$380,000Expected net cash flows:Year 1 150,000 130,000Year 2 160,000 130,000Year 3 170,000 130,000Required:Use the payback period to evaluate these two investment projects.
What will be an ideal response?
| ? | Expected net | Cumulative net |
| Year | cash flows | cash flows |
| Flyer | 0…. | ($424,000) | ($424,000) |
| 1…. | $150,000 | (274,000) |
| 2…. | $160,000 | (114,000) |
| 3…. | $170,000 | $56,000 |
Payback period = 2 years + ($114,000/$170,000) = 2.67 years
Skimmer: Payback period = $380,000/$130,000 per year = 2.92 years
Flyer has a slightly shorter payback period.
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