Question

Assume a $62,000 investment and the following cash flows for two alternatives:

Year Investment A Investment B

1 $20,000 $25,000

2 12,000 15,000

3 15,000 22,000

4 15,000 —

5 4,600,000 —

  

Calculate the payback for investment A and B. (Round the final answers to 2 decimal places.)

Payback period

Investment A years

Investment B years

  

Which of the alternatives would you select under the payback method?

Investment A

Investment B

Answer 1

Cash flows Year Investment A Investment B 0$ (62,000) $ (62,000) $ 1 $ 20,000 $ 25,000 $ 2 $ 12,000 $ 15,000 $ 3 $ 15,000 $ 22,000 $ 4 $ 15,000 $ - $ 5 $ 4,600,000 $ Cumulative cash flows Investment A Investment B -62,000 $ -62,000 -42,000$ -37,000 -30,000 $ -22,000 -15,000 $ - $ 4,600,000 $ Payback period 4.00 Years 3.00 Years Investment B should be choosen

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