Question

Please help me in this economics problem

You are considering two investment options. In option A, you have to invest $5,500 now and $800 three years from now. In option B, you have to invest $3,800 now $1,800 a year from now, and $1,000 three years from now. In both options, you will receive four annual payments of $1,800 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 i = 12% per year. (a) The conventional payback period for option A is years. (Round to the nearest whole number place.) The conventional payback period for option Bis 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 A O B. Both options are equally likely OC. Option B (b) The present worth of the option A is $ (Round to the nearest dollar.) The present worth of the option B is $ (Round to the nearest dollar.)

Answer 1

The given data is executed in an excel sheet.

1 Year -3800 CF Alternative A Cumulative CFA CF Alternative B Cumulative CF B PV @ 12% PV Alternative A PV Alternative B -5500 -5500 -3800 -5500.00 -3800.00 1800 -37001 -3800 0.8929 1607.22 0.001 1800 -1900 1800 -2000 0.7972 1434.96 1434.96 1000 -9001 800 -1200 0.7118 711.80 569.44 1800 900 1800 600 0.6355 1143.90 1143.900 NPV = -602.12 -651.70

a)

Formula for payback period = Number of Year before the full recovery + (Unrecovered cost at the start of that particular year / Cashflow during the next year)

Alternative A payback period = 3 + 900/1800 = 3.50 years

Alternative B payback period = 3 + 1200/1800 = 3.67 years

According to the calculation of  payback period, Alternative A should be choosen as it takes less time to payback.

b)

Present worth of option A = -$602

Present worth of option B = -$652

The excel formula are shown below:

ДА 1 Year 20 PV @ 12% 31 CF Alternative A -5500 1800 1800 =1800-800 1800 Cumulative CFA CF Alternative B -5500 -3800 =C2+B3 =1800-1800 =C3+B4 1800 =C4+B5 =1800-1000 =C5+B6 1800 Cumulative CFB -3800 =E2+D3 =E3+D4 =E4+D5 0.8929 0.7972 0.7118 0.6355 NPV = PV Alternative A =F2*B2 =F3*B3 =F4*B4 =F5*B5 =F6*B6 =SUM(G2:46) PV Alternative B =F2*D2 =F3*D3 =F4*D4 =F5*D5 =F6*D6 =SUM(H2:H6) =E5+D6

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