BUS330.01 Fall 2017 Nugent Homework: Chapter 10 Homework Score: 0 of 1 pt P10-4
ID: 2797122 • Letter: B
Question
BUS330.01 Fall 2017 Nugent Homework: Chapter 10 Homework Score: 0 of 1 pt P10-4 (similar to) 20' 10 (1 complete) HW Score: 10%, 1 of 10 pts Question Help payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $5,800 today and promises to pay annual cash flows of $2,200, $2,600, $2,600, $2,000 and $1,700 over the next 5 years Or, Bill can invest $5,800 in project B that promises to pay annual cash flows of $1,600 $1,600, S1,600, $3,500 and $4,100 over the next 5 years. (Hint For mixed stream cash inflows, calculate cumulative cash inlows on a year-to year basis untia the inthal snvestment is recovered) a. How long will it take for Bill to recoup his initial investment in project A? b. How long will it take for Bill to recoup his initial investment in project B? . For Bill to reco up his intil m estment in pro ed Aitwiltakeyears Round to two de m al places ) Enter your answer in the answer box and then click Check Answer. Clear All 3 Pertaining °Type here toExplanation / Answer
To compute the payback period with uneven cash inflows, compute the cumulative cash inflows first -
Project A
The initial investment is $5800. The cumulative cash inflows go over the initial investment amount of $5800 in year 3. However, not by the exact amount. So, we need to interpolate to compute the payback period -
Amount recovered till year 2 = $4800
Extra amount needed to recover investment = $5800 - $4800 = $1000
Total Cash inflows in year 3 = $2600
Payback period = 2 years + (1 year x $1000 / $2600) = 2.38461538461 or 2.38 years
Project B
$8300 + $4100 = $12400
The initial investment is the same $5800. The cumulative cash inflows go over the initial investment amount of $5800 in year 4. However, not by the exact amount. Again, we need to interpolate to compute the payback period -
Amount recovered till year 3 = $4800
Extra amount needed to recover investment = $5800 - $4800 = $1000
Total Cash inflows in year 4 = $3500
Payback period = 3 years + (1 year x $1000 / $3500) = 3.28571428571 or 3.29 years
Year Cash Inflows Cumulative Cash Inflows 1 $2200 $2200 2 $2600 $2200 + $2600 = $4800 3 $2600 $4800 + $2600 = $7400 4 $2000 $7400 + $2000 = $9400 5 $1700 $9400 + $1700 = $11100Related Questions
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