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    How do you calculate the payback of mutually exclusive projects with depreciation?

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    You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

    Reference: 06_02

    Project A Project B

    Year Cash Flow Year
    0 -75,000 0 -70,000
    1 19,000 1 10,000
    2 48,000 2 16,000
    3 12,000 3 72,000

    Required rate of return 10% 13%
    Required Payback Period 2.0 2
    Required accounting return 8% 11%

    Based upon the payback period and the information provided in the problem, you should:
    a. accept both project A and project B.
    b. reject both project A and project B.
    c. accept project A and reject project B.
    d. accept project B and reject project A.
    e. require that management extend the payback period for project A since it has a higher initial cost.

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    Solution Preview

    Project A Project B

    Year Cash Flow Year
    0 -75,000 0 -70,000
    1 ...

    Solution Summary

    This solution shows how to determine the payback period with step by stap calculations and an interpretation of the answer.