Question

I am having an issue solving this one as well. It is 5 parts, and I assume it will be like conventional payback period for Option A, Option B, then Present worth criterion at 9% interest for Option and Option B. Thank you in advance for your assistance!

You are considering two investment options. In option A, you have to invest $5,000 now and $1,500 three years from now. In option B, you have to invest $3,300 now, $1,600 a year from now, and $1,000 three years from now. In both options, you will receive four annual payments of $2,400 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 9% interest? Assume that all cash flows occur at the end of a year. Click the icon to view the interest factors for discrete compounding when 9% per year (a) The conventional payback period for option A is years. (Round to the nearest whole number place.)

Answer 1

Payback period

Year	Option A		Option B
	Cash Flow	Cumulative	Cash Flow	Cumulative
0	- 5,000	-5,000	-3,300	- 3,300
1	2400	- $ 2,600	2400-1600= 800	- 2,500
2	2400	- $ 200	$ 2400	- 100
3	-1500+2400=900	700	$ 2400 - 1000 = 1400	1300
4	2,400	3100	2400	3700

Payback period of option A = 2 year + (200/2400) = 2.083 years

Payback period option B = 2 years + (100/1400) = 2.071 years

Select B since payback period is less than option A.

Calculation of present worth

PW_A = - 5,000 + 2,400(P/A,9%,4) - 1,500(P/F,9%,3)

PW_A = - 5,000 + 2,400*3.2397 -1,500*0.7722

PW_A = $ 1,616.98

Similarly in case of option B

PW = - 3,300 + 2,400(P/A,9%,4) -1,600(P/F,9%,1) - 1,000 (P/F, 9% ,3)

PW_B = - 3,300+ 2400*3.2397 - 1600*0.9174 - 1000*0.7722

PW_B = - $ 2,235.20

Select A.