Bill Williams has opportunity to invest in project A that costs 5500 today and p
ID: 2715396 • Letter: B
Question
Bill Williams has opportunity to invest in project A that costs 5500 today and promises to pay annual cash flows of 2200, 2600,2600, 1900, 1800 over the next 5 years . Or bill can invest 5500 on project B that promises to pay annual cash flow of 1300 , 1300, 1300, 3500 and 3900over next 5 years . Hint for mixed stream cash inflows calculate cumulative cash inflows on a year to year basis until the initial investment is recovere 1. how long will it take bill to recoup his initial investment in project A round 2 decimal places 2 how long will it take bill to recoup his initial investment in project B round 2 decimal places 3. Using the payback period which project should bill choose 4. Do you see any problems with his choice ?Bill Williams has opportunity to invest in project A that costs 5500 today and promises to pay annual cash flows of 2200, 2600,2600, 1900, 1800 over the next 5 years . Or bill can invest 5500 on project B that promises to pay annual cash flow of 1300 , 1300, 1300, 3500 and 3900over next 5 years . Hint for mixed stream cash inflows calculate cumulative cash inflows on a year to year basis until the initial investment is recovere 1. how long will it take bill to recoup his initial investment in project A round 2 decimal places 2 how long will it take bill to recoup his initial investment in project B round 2 decimal places 3. Using the payback period which project should bill choose 4. Do you see any problems with his choice ?
1. how long will it take bill to recoup his initial investment in project A round 2 decimal places 2 how long will it take bill to recoup his initial investment in project B round 2 decimal places 3. Using the payback period which project should bill choose 4. Do you see any problems with his choice ?
Explanation / Answer
1. Time to recoup his initial investment in project A =
2 year + 700 / 2600 = 2.27 years.
2. Time to recoup his initial investment in project B =
3 year + 1600 / 3500 = 3.46 years.
3. Using the payback period project A should bill choose because this project has low pay-back period in compare to project B.
4. No, on the basis of pay-back period his choice is good but in this method post pay-back period profits are left. So under this method full return on a project is not studied. In project A total return in 5 years is $11100 but in case project B it is $11300 but by using pay-back period method project A is selected this is major problem with this method.
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