assume a $72,000 investment and the following cash flows for two alternatives. y

Question

assume a $72,000 investment and the following cash flows for two alternatives.

year.            Inv A.         Inv.B
1.                 25,000.       22,000
2.                 25,000.       15,000
3.                15,000.        50,000
5.                10,000.        _______
5.                30,000.        _______

A. calculate the payback for investme,t A and B

Inv A ______years
Inv B ______years

B.which investment would you select under the payback method

C. if the inflow in the fifth year for investment A was 30,000,000 instead of 30,000, would your answer change under the payback method?

Explanation / Answer

Project A

Payback Period Calculation : Till year 3 the amount remaining exceeds the cash flow for that period while for year 4 the amount remaining (7000) < cash flow for that period (10000). So whole 3 years and part of 4th year. Hence Payback period = 3 + 7000/10000 = 3.7 years

Payback Period Calculation : Till year 2 the amount remaining exceeds the cash flow for that period while for year 3 the amount remaining (35000) < cash flow for that period (50000). So whole 2 years and part of 3th year. Hence Payback period = 2 + 35000/50000 = 2.7 years

B) Using payback period method we would choose Investment 2 as it has lower payback period i.e. we get our money sooner

C) No, since in payback period we purely focus on how quick our initial investment gets recovered the answer would remain same.

Project A

Period 1 2 3 4 5 Amount at Beginning 72000 47000 22000 7000 Payment 25000 25000 15000 10000 30000 Amount Remaining 47000 22000 7000 Payback Period 3.7

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