Question

You are considering two investment options. In option​ A, you have to invest ​$6,000 now and ​$1,100 three years from now. In option​ B, you have to invest ​$3,200 ​now,​ $1,300 a year from​ now, and ​$1,000 three years from now. In both​ options, you will receive four annual payments of ​$2,200 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 8​% ​interest? Assume that all cash flows occur at the end of a year.

​(a) The conventional payback period for option A is how many years. ​(Round to the nearest whole number​ place.)

(b) The conventional payback period for option B is how many years. ​(Round to the nearest whole number​ place.)

(c) Which of these options would you choose based on the conventional payback​ criterion? Choose the correct answer below.

A. Option B

B. Both options are equally likely

C. Option A

​(d) The present worth of the option A is what. ​(Round to the nearest​ dollar.)

(e)  Which of these options would you choose based on the present worth​ criterion? Choose the correct answer below.

A. None of the options

B. Option A

C. Option B

Answer 1

Req A:
OPTION-A
Year	cash inflows	Outflows	Net cashflows		Cumulative Net cash flows
0	0	-6000	-6600		-6600
1	2200		2200		-3800
2	2200		2200		-1600
3	2200	-1100	1100		-500
4	2200		2200		1700
Payback period: 3 years + 500 /2200 = 3 years+ 0.23 years = 3.23years
Rreq B:
Option-B
Year	cash inflows	Outflows	Net cashflows		Cumulative Net cash flows
0	0	-3200	-3200		-3200
1	2200	-1300	900		-2300
2	2200		2200		-100
3	2200	-1000	1200		1100
4	2200		2200		3300
Payback period: 2 years + 100 /1200 = 3 years+ 0.08 years = 2.08 years
Rreq C:
As payback period of Option-B is lower, therefore Option-B is accepted
Answer is A. Option B
Req D:
OPTION-A
Year	cash inflows	Outflows	Net cashflows		PVF @ 8%	Present values
0	0	-6000	-6600		1	-6600
1	2200		2200		0.925926	2037.037
2	2200		2200		0.857339	1886.145
3	2200	-1100	1100		0.793832	873.2155
4	2200		2200		0.73503	1617.066
		NPV				-186.5
Req E:
Answer is C. Option-B
Option-B
Year	cash inflows	Outflows	Net cashflows		PVF @ 8%	Present values
0	0	-3200	-3200		1	-3200
1	2200	-1300	900		0.925926	833.3333
2	2200		2200		0.857339	1886.145
3	2200	-1000	1200		0.793832	952.5987
4	2200		2200		0.73503	1617.066
		NPV				2089.14