Question

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

Answer 1

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