Assume a $52,000 investment and the following cash flows for two alternatives. Y

Question

Assume a $52,000 investment and the following cash flows for two alternatives. Year Investment X Investment Y 1 $ 12,000 $ 20,000 2 18,000 25,000 3 15,000 17,000 4 10,000 — 5 15,000 — a. Calculate the payback for investment X and Y. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Payback   Investment X years   Investment Y years b. Which alternative would you select under the payback method? Investment X Investment Y Assume a $52,000 investment and the following cash flows for two alternatives.

Explanation / Answer

Payback period = Year up to which cummulative cash flow is negative + (cummulative cash flow of that year /cash flow of next year)

   X = 3 + (7000 /10000)

             = 3 +.7

             = 3.7 Years

y= 2 + (7000 / 17000)

   = 2 + .41

    = 2.41 years

b)Investment Y as payback period is lower

year Investment X Y cash flow cummulative cash flow cash flow cummulative cash flow 0 -52000 -52000 -52000 -52000 1 12000 -40000    [-52000+12000] 20000 -32000 2 18000 - 22000   [-40000+18000] 25000 -7000 3 15000 - 7000    [ -22000+15000] 17000 10000 4 10000 3000     [-7000+10000] 5 15000

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