Question

Can you please show the steps of how to solve (in excel preferred) please, thank you!

Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $10.000 today and promises to pay $2,400, $2,300, $2,300, $2.200 and $1,700 over the next 5 years. Or, Bill can invest $10,000 in project B that promises to pay $1,200, $1,200, $1,200, $3,800 and $4,200 over the next 5 years. (Hint: For mixed stream, calculate cumulative cash inflows on year-to-year basis until the initial investment is recovered.) a. How long will it take for Bill to recoup his initial investment in project A? b. How long will it take for Bill to recoup his initial investment in project B? C. Using the payback period, which project should Bill choose? d. Do you see any problems with his choice?

Answer 1

Calculation of Payback Period:
Project A
Year	Cash Flow	Balance
0	-10000	-10000
1	2400	-7600
2	2300	-5300
3	2300	-3000
4	2200	-800
5	1700	900
				Unrecovered Cost at start of the year
Payback Period           =	Years before + full recovery
		Cashflow During the Year
	=	4 years + (800/1700) years
	=	4.47 years
Project B
Year	Cash Flow	Balance
0	-10000	-10000
1	1200	-8800
2	1200	-7600
3	1200	-6400
4	3800	-2600
5	4200	1600
				Unrecovered Cost at start of the year
Payback Period           =	Years before + full recovery
		Cashflow During the Year
	=	4 years + (2600/4200) years
	=	4.62 years
Problem (a):
Time taken for Bill to recoup his initial investment in Project A = 4.47 years
Problem (b):
Time taken for Bill to recoup his initial investment in Project B = 4.62 years
Problem (c ):
>Payback period of Project A is less then Project B
>Using Payback period model, Project A can be choosed.
Problem (d):
> Discount rate is not considered it means, Time value of money is not taken
into consideration while choosing project
>If Discount rates are considered then the decision may chage