Question

You are considering two investment options. In option A. you have to invest $6,000 now and $700 three years from now. In option B. you have to invest $3,000 now, $1,300 a year from now, and $800 three years from now. In both options, you will receive four annual payments of $1,900 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 10% 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 i = 10% per year. (a) The conventional payback period for option Ais The conventional payback period for option Bis years. (Round to the nearest whole number place.) years. (Round to the nearest whole number place) Which of these options would you choose based on the conventional payback criterion? Choose the correct answer below. O A. Option B OB. Option A OC. Both options are equally likely (b) The present worth of the option A is $ (Round to the nearest dollar.) The present worth of the option is $ (Round to the nearest dollar.) Which of these options would you choose based on the present worth criterion? Choose the correct answer below. O A. Option A OB. None of the options O c. Option B

Answer 1

option B is better than option A for payback period.

IMPORTANT.

the present worth of option B is 4782.5, It is mistakenly written as 478.25 in the picture. Please make sure to write correctly.

2229 - 5101 Option A To= $6000 T = $7000 option B To = $3000 T = $1300 T3 = $800 - (a) Payback period option A Total outflow = 86700 Inflows. cumulative c.f l. 1900 1900 3800 1900 5700 z 1900 7600 Payback period & 3+ (6700-5700) 1900 2. - 3.53 years. = 4 years 4 • 1900 Option B Total outflow = $510o. Payback period = 2 + (5100-3800) 1900 - 2. 68 years - 3 years

(6) Present worth since the unflows are equal (same for both the options, we will compare the investment outflows option A k = 10% 700 x PVF (10) 3) + 6000 = 700 X 0.751 + 6000 = 6525.7 Total P.U of cash outflow is $60oots $6525.7 UUU option B 13008 P Vf (10% + 800 x P vf (10%, 3) + 3000 1300 x 0.909 + 800 X 0.751 + 3000 - 1181.7+ 600.8 + 3000 = 478.25 Total P.U of Cashout flow is $ 478.25 option B is better than A