Question

1) please include the formulas used

Investment A: Year: Cash flow: -514,000 $5,500 $5,500 $5,500 55,500 Investment B: Year: Cash flow: -$15,000 $6,000 $6,000 $6,000 $6,000 $6,000 Investment C: Year: Cash flow: -518,000 $12,000 $2,000 The cash fows for three projects are shown above. The cost of capital is 7.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take? 1000 $5.500 $6.00 $12,000 $3.500 $0.00 $2,000 $6.500 $0.00 $2,00 $5.500 $0.00 $2,00 $0.00 $2,000 O A. Investment A O B. Investment B O C. Investment OD. none of these investments

2)i know the answer but having trouble remember how i calculated IRR and interception points

Answer 1

1]

Payback period is the time taken for the cumulative cash flows to equal zero

Payback period of A  = 2 + (cash flow required in year 3 for cumulative cash flows to equal zero / year 3 cash flow) = 2 + ( $3000 / $5500) = 2.55 years.

Payback period of B  = 2 + (cash flow required in year 3 for cumulative cash flows to equal zero / year 3 cash flow) = 2 + ( $3000 / $6000) = 2.5 years.

Payback period of C  = 3.0 years

A 1 Year B C D E F G Cumultive Cumultive Cumultive Cash Cash Cash Cash Flow - Cash Flow - Cash Flow Flow - A Flow-B Flow - C A 0 (14,000) (15,000) (18,000) (14,000) (15,000) (18,000) 5,500 6,000 12,000 (8,500) (9,000) (6,000) 2 5,500 6,000 2,000 (3,000) (3,000) (4,000) 35,500 6,000 2,000 2,500 3,000 (2,000) 4 5,500 6,000 2,000 8,000 9,000 5 5,500 6,000 2,000 13,500 15,000 2,000

A B C Cumultive Cash Flow - Cumultive Cash Flow - Cumultive Cash Flow - A 1 Year 20 31 42 5 3 Cash Flow -A -14000 5500 5500 5500 5500 5500 Cash Flow - B - 15000 6000 6000 6000 6000 6000 Cash Flow-C - 18000 12000 2000 2000 2000 2000 =B2 =E2+B3 =E3+B4 =E4+B5 =E5+B6 =E6+B7 =C2 =F2+C3 =F3+C4 =F4+C5 =F5+C6 =F6+C7 =D2 =G2+D3 =G3+D4 =G4+D5 =G5+D6 =G6+D7 6 75

D - None of these investments.

None of the investments have a payback period of less than 2 years.