Within the context of business decisions and financial forecasting, which, if either, of two projects would be acceptable to a company that has established a "payback" period of not more than six...
Within the context of business decisions and financial forecasting, which, if either, of two projects would be acceptable to a company that has established a "payback" period of not more than six years: Project A, which has a payback period of eight years, or Project B which has a payback period of seven years?
If a company has established a policy of only accepting proposals that will return an investment in no more than six years, then proposals that are forecast to begin to “payback” in seven or eight years are, then, unacceptable. Whether one or both of the proposals can be modified, for example, scaled-back in scope, so as to begin to pay a return on investment in the requisite six years is the question management would need to ask, assuming, of course, that one or both of the proposals are otherwise consistent with the direction in which the company wants to go.
Crucial to answering a question on which of two proposals, or both, can be acceptable despite not projecting a return on investment within the desired time frame is an assessment of precisely how important the “six year” target is to those at the top of the corporate pyramid. If “six years” is a goal, but not necessarily a financial imperative, then perhaps flexibility can be applied and the more attractive of the two proposals accepted for execution. If the six year timeframe is vital to the company’s well-being, however, than neither proposal will suffice, and a third alternative, possibly a modification of one of the two projects mentioned, is required.