Assume a $45,000 investment and the following cash flows for two
alternatives.
Year | Investment X | Investment Y | ||||
1 | $10,000 | $15,000 | ||||
2 | 15,000 | 25,000 | ||||
3 | 10,000 | 10,000 | ||||
4 | 20,000 | — | ||||
5 | 20,000 | — | ||||
a. Calculate the payback for investment X and Y.
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
b. Which alternative would you select under the
payback method?
Investment X
Investment Y
Project X | ||
Year | Cash flow stream | Cumulative cash flow |
0 | -45000 | -45000 |
1 | 10000 | -35000 |
2 | 15000 | -20000 |
3 | 10000 | -10000 |
4 | 20000 | 10000 |
5 | 20000 | 30000 |
Payback period is the time by which undiscounted cashflow cover the intial investment outlay | ||
this is happening between year 3 and 4 | ||
therefore by interpolation payback period = 3 + (0-(-10000))/(10000-(-10000)) | ||
3.5 Years | ||
Project Y | ||
Year | Cash flow stream | Cumulative cash flow |
0 | -45000 | -45000 |
1 | 15000 | -30000 |
2 | 25000 | -5000 |
3 | 10000 | 5000 |
Payback period is the time by which undiscounted cashflow cover the intial investment outlay | ||
this is happening between year 2 and 3 | ||
therefore by interpolation payback period = 2 + (0-(-5000))/(5000-(-5000)) | ||
2.5 Years | ||
Choose project Y as it has lower payback
Assume a $45,000 investment and the following cash flows for two alternatives. Year Investment X Investment...
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