Question

In: Finance

Investment A: Year: 0 1 2 3 4 5 Cash flow: -$14,000 $6,000 $6,000 $6,000 $6,000...

Investment A:
Year: 0 1 2 3 4 5
Cash flow: -$14,000 $6,000 $6,000 $6,000 $6,000 $6,000

Investment B:
Year: 0 1 2 3 4 5
Cash flow: -$15,000 $7,000 $7,000 $7,000 $7,000 $7,000

Investment C:
Year: 0 1 2 3 4 5
Cash flow: -$18,000 $12,000 $4,000 $4,000 $4,000 $4,000

The cash flows for three projects are shown above. The cost of capital is 7.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take?

Select one:

A. Investment A

B. Investment B

C. Investment C

D. none of these investments

Expert Solution

Pay back period is the period in which initial investment is recovered.

Investment A:

Payback Peiord = Iniital Investment / CF per anum

= $ 14,000 / $ 6000

= 2.333

Investment B:

Payback Peiord = Iniital Investment / CF per anum

= $ 15,000 / $ 7000

= 2.13

Investment C:

Year	Opening Balance	Amount	Amount to be recovered
1	$ 18,000.00	$ 12,000.00	$ 6,000.00
2	$ 6,000.00	$ 4,000.00	$ 2,000.00
3	$ 2,000.00	$ 4,000.00	$ -2,000.00
4	$ -2,000.00	$ 4,000.00	$ -6,000.00
5	$ -6,000.00	$ 4,000.00	$ -10,000.00

Payback Peiord = Period in which least +ve BBalance to be recovered + [ Amount to be recovered in that Year / Amount Receovered in Next Year ]

= 2 Years + [ 2000 / 4000 ]

= 2 Years + 0.5 Years

= 2.5 Years

Expected Payback period is 2 Years. However all these investments has Payback period is more than 2 Years.

Thus do not select any Investment.

OPtion D is correct.

jeff jeffy answered 1 year ago

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