Each alternative involves an initial outlay of $100,000. Their cash flows follow
ID: 2759352 • Letter: E
Question
Each alternative involves an initial outlay of $100,000. Their cash flows follow:
Year
A
B
C
D
1
10,000
50,000
25,000
-
2
20,000
40,000
25,000
-
3
30,000
30,000
25,000
45,000
4
40,000
-
25,000
55,000
5
50,000
-
25,000
60,000
For each alternative calculate the Payback period for each alternative. Specify the best answer.
Payback period A, B, C, D.
Would you please explain how to calculate? Thank you.
Year
A
B
C
D
1
10,000
50,000
25,000
-
2
20,000
40,000
25,000
-
3
30,000
30,000
25,000
45,000
4
40,000
-
25,000
55,000
5
50,000
-
25,000
60,000
Explanation / Answer
Answer
Alternative A
Payback period = 4 years
Alternative B
Payback period = 2+ 10000/30000
Payback period = 2.33 Years
Alternative C
Payback period = 4 years
Alternative D
Payback period = 4 years
Decision : Best Alternative is B whose Payback period is 2.33 Year which is lower among all.
Working
Note : Payback period is the period at which cash outlay is recovered by which period i.e Period on which cummulative cash flow is equal to zero
Year A B Cash Flow Cummulative Cash Flow Cash Flow Cummulative Cash Flow 0 -100000 -100000 -100000 -100000 1 10000 -90000 50000 -50000 2 20000 -70000 40000 -10000 3 30000 -40000 30000 20000 4 40000 0 0 20000 5 50000 50000 0 20000Related Questions
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