X:
Year | Cash flows | Cumulative Cash flows |
0 | (60,000) | (60,000) |
1 | 20,000 | (40,000) |
2 | 15000 | (25000) |
3 | 15000 | (10,000) |
4 | 20,000 | 10,000 |
5 | 25000 | 35000 |
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=3+(10000/20,000)
=3.5 years
Y:
Year | Cash flows | Cumulative Cash flows |
0 | (60,000) | (60,000) |
1 | 25000 | (35000) |
2 | 25000 | (10,000) |
3 | 15000 | 5000 |
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=2+(10,000/15000)
=2.67 years(Approx)
Investment X | 3.5 years |
Investment Y | 2.67 years |
Hence Investment Y is better having lower payback.
Assume a $60,000 investment and the following cash flows for two alternatives. Year Investment X $20,000...
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