3 (2 points) Payback: An asset has the following cash flow: Year Amount180900$10

Question

3 (2 points) Payback: An asset has the following cash flow: Year Amount180900$100 $100 $10090 S100 $100 3.1 Calculate the payback period without discounting. 3.2 Calculate the payback period with discounting using your company's MARR-5%. 3.3 Make a table to describe three advantages of the payback method without discounting vs. the Present Worth method, or the opposite. Note: if you should think of disadvantages of the first method over the second, you can of course turn them around and cast them as an advantage of the second over the first.

Explanation / Answer

3.1 Year 0 1 2 3 4 5 6 7 8 Amount -180 -90 0 100 100 100 -90 100 100 Cumulative cash flow -180 -270 -270 -170 -70 30 -60 40 140 Payback period without discounting (Year corresponding to the Last negative cash flow+(Absolte value of that negative cash flow/Amt. of cash cash flows for the immediately next Year 6+(60/100)= 6.6 Years 3.2 Year 0 1 2 3 4 5 6 7 8 Amount -180 -90 0 100 100 100 -90 100 100 PV F at 5% 1 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 PV at 5% -180 -85.71 0.00 86.38 82.27 78.35 -67.16 71.07 67.68 Cumulative cash flow -180 -265.71 -265.71 -179.33 -97.06 -18.71 -85.87 -14.80 52.89 Payback with discounting the cash flows at 5% 7+(14.8/67.68)= 7.2 Years 3.3. ADVANTAGES of Both Simple Pay back Discounted pay-back 1.As the name suggests , simple to use & easy to calculate as well as to understand & intrepret. 1. Considers time value of money ,giving a more accurate picture, of differently timed cash flows. 2.Helps to do an immediate comparison of various available investments & the length of the individual time-taken to recoup their respective initial investments. 2.Gives an actual picture of risk involved ,over the timing of cash flows. 3. Helps to make an immediate rough estimate of the investment profitability & the possible range of the firm's value.   3. Uses the cost of acquiring finance or cost of capital to discount cash flows.So the incomes are directly measured/ linked to the cost of funding of the initial investment.

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