Question

B&E Incorporated is trying to select the best alternative from two options. Each alternative has an initial cash outlay of $100,000. The cash flows for the alternatives are as follows:

Year	Investment A	Investment B
1	$ 10,000	$ 50,000
2	20,000	40,000
3	30,000	30,000
4 5	40,000 150,000	0 0

For each alternative investments, compute the Payback Method and select the best investment (using the Payback Method Results).

Answer 1

Payback Period for INVESTMENT-A

Year	Cash Flows ($)	Cumulative net Cash flow ($)
0	(100,000)	(100,000)
1	10,000	(90,000)
2	20,000	(70,000)
3	30,000	(40,000)
4	40,000	-
5	150,000	150,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 3.00 Years + ($40,000 / $40,000)

= 3.00 Years + 1.00 Years

= 4.00 Years

Payback Period for INVESTMENT-B

Year	Cash Flows ($)	Cumulative net Cash flow ($)
0	(100,000)	(100,000)
1	50,000	(50,000)
2	40,000	(10,000)
3	30,000	20,000
4	0	20,000
5	0	20,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2.00 Years + ($10,000 / $30,000)

= 2.00 Years + 0.33 Years

= 2.33 Years