QUESTION 7 THIS QUESTION SHOULD BE ANSWERED IN THE SPACE PROVIDED IN BLACKBOARD
ID: 2804120 • Letter: Q
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QUESTION 7 THIS QUESTION SHOULD BE ANSWERED IN THE SPACE PROVIDED IN BLACKBOARD 7) A company uses the payback method to evaluate capital budgeting projects. It is currently considering projects A, 8 and C Project A Project 8 Project C Initial cost (cash outflow) 10,000 $10,000 $10,000 Cash inflows 1st year 2nd year 3rd year $1,000$10,000$5,000 5,000 $35,000 9,000 15,000 a) Find the payback period for each of the above capital budgeting projects. Label the payback b) What two major weaknesses of the payback method are illustrated by this problem? Explair $1,000 0 period for each project so I can see which payback period goes with which project. Click Sove and Suhit to sove and sht Cek Save A Asacers to sove all onseers Save Al Answers MacBopk Pro 7Explanation / Answer
a) Project A Project B Project C
Initial Investment $10,000 $10,000 $10,000
recovery of initial investment 2nd year 1st Year 2nd Year
($1,000+$9,000) ($10,000) ($5,000+$5,000)
b) Based on paybak period Project B is the best option.However if we consider the total cash flow, Project B yield
less compared with Project A and C.Projet B does not yield any cash flow in 3rd year.Also Project A and C payback period are same however project A yield less cash flow in the first year.If we consider total cash flow again between A and C , C will be the best option.
Another drawback for pay back period is it ignore the time value of money.
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