PROJECT ABUWA

(a)

i. Assuming that cash flows occur at year end
Pay Back Period = A + B/C
Where;
A = the last year with a negative cumulative cash flow
B= the absolute value of cumulative net cash flow at the end of the period A(the last year with a negative cumulative cash flow)
C = the total cash inflow during the period following period A

Workings:
(i) Assuming cash flows occur at a constant rate throughout the year:
Project ABUWA will pay back after
2 years + {(240,000 /360,000) x 12 months}
=2 years 8 months

Project BRIWA will pay back after
1 year + {(200,000 /240,000) x 12 months}
=1 year 10 months

If cash flows occur at the end of each year, project ABUWA will pay
back at the end of year 3 and project BRIWA will pay back at the end
of year 2.

(ii) Assuming that cash flows after Year 0 at a constant rate throughout
each year:
Pay Back Period + Initial Outlay / Annual Constant Cash Flow

PROJECT ABUWA
Cash flow after year 0 = N 200,000
Pay Back Period = N800,000 / N200,000 = 4 years

PROJECT BRIWA
Cash flow after year 0 = N600,000
Pay Back Period = N800,000 / N600,000
= 1.33 years

Assuming cash flows after Year 0 is at a constant rate throughout each year,
project ABUWA will pay back at the end of year 4 and project BRIWA will pay
back at the end of year 2.

(b) Project BRIWA should be selected as it has an earlier payback period

(c) Reason:  Based on the company’s policy, the project with the earlier payback period is chosen. Project BRIWA achieves payback earlier, within 2 years, while Project ABUWA reaches payback at 3 years.