Question

1. Point-of-Sale System: We have two companies that can implement a point-of-sale system. Both with cost $200,000 to implement. Company A says we will receive the following returns on our investment: Year 1: $85,000; Year 2: $25,000; Year 3: $30,000; Years 4–10: $10,000. Company B says we will receive the following returns on our investment: Year 1: $30,000; Year 2: $25,000; Year 3: $85,000; Years 4–10: $10,000. Using the payback method, which company should we use and Why?

Answer 1

Calculation of Pay Back Period:

Based on the above table, both the companies can recover the investment of $200,000 in 9th year only. Hence, based on the Pay Back period, any of the company can be chosen but if we observe each year cumulative cash flows column, till 3rd year, both the companies have recovered same amount that is $140,000 but if we observe in the second year, Company A has recovered $110,000 which is higher compare with Company B's recovered amount of $55,000 in the second year. Hence, on that contest, Company A can be chosen but if we consider the full recovery of full amount of $200,000 then any company cab be chosen based on the pay back period.