Question

Need assistance with this question.

Part A is:

What is the conventional payback period for Option A? Answer -

What is the conventional payback period for Option B? Answer -

Part B is:

What is the Present Worth of Option A? Answer -

What is the Present Worth of Option B? Answer -

I really appreciate the assistance

You are considering two investment options. In option A, you have to invest S5,500 now and $700 three years from now. In option B, you have to invest $3,600 now, S1,500 a year from now, and $1,000 three years from now. In both options, you will receive four annual payments of $1,600 each. (You will get the first payment a year from now.) Which of these options would you choose based on (a the conventional payback criterion, and (b) the present worth criterion, assuming 12% interest? Assume that all cash flows occur at the end of a year Click the icon to view the interest factors for discrete compounding when ,-12% per year.

Answer 1

Payback period

option A Option B cash flow Cumulative Cash Flow Cumulative yr 0 1 5500 1600 1600 900 1600 5500 3900 2300 1400 200 3600 100 1600 600 1600 3600 -3500 1900 1300 300 4 PBP option A 3.875 PBP option B 3.8125

Determine the PW

PW_A = -5500 +1600(P/A,12%,4) -700(P/F,12%,3)

PW_A = -5500 + 1600* 3.0373 -700* 0.6355

Present worth of A = - $ 1085

Now, PW_B= -3600 +1600*3.0373 -1500*0.8929 -1000*0.7118

PW_B = - $ 972.46

Since PW of B is less thus select B.

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