Question

In: Finance

Assume a $105,000 investment and the following cash flows for two alternatives. Year Investment X Investment...

Assume a $105,000 investment and the following cash flows for two alternatives.

Year Investment X Investment Y
1 $30,000 $40,000
2 45,000 35,000
3 15,000 35,000
4 30,000
5 10,000


a. Calculate the payback for investment X and Y. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
  



b. Which alternative would you select under the payback method?
  

  • Investment X

  • Investment Y

Solutions

Expert Solution

a.

Payback Period

Investment X 3.50 Years

Investment Y 2.86 Years

b.

Investment Y

Working:

Payback period is the time within which cost of project is recovered back.
Project which has shorter payback is better because it recovers investment in lesser time.
Investment X
Year Cash Flow Cumulative Cash Flow
0 -1,05,000.00 -1,05,000.00
1 30,000.00 -75,000.00
2 45,000.00 -30,000.00
3 15,000.00 -15,000.00
4 30,000.00 15,000.00
5 10,000.00 25,000.00
Payback Period = 3+(15000/30000)
= 3.50 Years
Investment Y
Year Cash Flow Cumulative Cash Flow
0 -1,05,000.00 -1,05,000.00
1 40,000.00 -65,000.00
2 35,000.00 -30,000.00
3 35,000.00 5,000.00
Payback Period = 2+(30000/35000)
= 2.86 Years

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