Question

You are considering two investment options. In option A, you have to invest RM4000 now and RM1000 three years from now, In option B, you have to invest RM1500 now, RM1500 a year from now, and RM1000 three years from now. In both options, you will receive four annual payments of RM4000 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 10% interest? Format : A Based on conventional payback period method, choose either (A/B/Both) PW Option A PW Option B Format : 8757.9 Format : 8035.77 Format : A Based on PW analysis method, choose Option (A or B)

Answer 1

total investment under option a is RM5000

Total inflow under option a is RM16000

Payback Period =	A +	B
C

Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and
C is the total cash inflow during the period following period A

Payback period is 1+8000-4000/16000

=1.25 years

total investment under option a is RM4000

Total inflow under option a is RM16000

Payback period is 1 year

hence option b is to be choosed

B)

year	c.outflow	c.inflow	net income	pv factor @10%
0	4000	0	-4000	1	-4000
1	0	4000	4000	0.909091	3636.364
2	0	4000	4000	0.826446	3305.785
3	1000	4000	3000	0.751315	2253.944
4	0	4000	4000	0.683013	2732.054
					7928.147

PW option A is 7928.47

year	c.outflow	c.inflow	net income	pv factor @10%
0	1500	0	-1500	1	-1500
1	1500	4000	2500	0.909091	2272.727
2	0	4000	4000	0.826446	3305.785
3	1000	4000	3000	0.751315	2253.944
4	0	4000	4000	0.683013	2732.054
					9064.511

PW option B is 9064.511

Based on PW Option B is to be choosed