Assume a $52,000 investment and the following cash flows for two alternatives. |
Year | Investment X | Investment Y | ||||
1 | $ 12,000 | $ 20,000 | ||||
2 | 18,000 | 25,000 | ||||
3 | 15,000 | 17,000 | ||||
4 | 10,000 | — | ||||
5 | 15,000 | — | ||||
a. | Calculate the payback for investment X and Y. (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
Payback | ||
Investment X | years | |
Investment Y | years | |
b. | Which alternative would you select under the payback method? | ||||
|
year | Investment X | Y | ||
cash flow | cummulative cash flow | cash flow | cummulative cash flow | |
0 | -52000 | -52000 | -52000 | -52000 |
1 | 12000 | -40000 [-52000+12000] | 20000 | -32000 |
2 | 18000 | - 22000 [-40000+18000] | 25000 | -7000 |
3 | 15000 | - 7000 [ -22000+15000] | 17000 | 10000 |
4 | 10000 | 3000 [-7000+10000] | ||
5 | 15000 |
Payback period = Year up to which cummulative cash flow is negative + (cummulative cash flow of that year /cash flow of next year)
X = 3 + (7000 /10000)
= 3 +.7
= 3.7 Years
y= 2 + (7000 / 17000)
= 2 + .41
= 2.41 years
b)Investment Y as payback period is lower
Assume a $52,000 investment and the following cash flows for two alternatives. Year Investment X Investment...
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