Porter Company is analyzing two potential investments.

 Porter Company is analyzing two potential investments.
 

                              Project X    Project Y
Initial investment    $ 71,250    $ 61,000
Net cash flow:         
             Year 1        24,500    4,100
                 Year 2    24,500    26,500
                 Year 3    24,500    26,500
                 Year 4         0       21,000

If the company is using the payback period method, and it requires a payback of three years or less, which project(s) should be selected?

Multiple Choice

Both X and Y are acceptable projects.


Project Y.


Project Y because it has a lower initial investment.


Project X. Correct

Neither X nor Y is an acceptable project.

Explanation
Project X payback period: $71,250/$24,500 per year =2.91 years
Project Y payback period: