Question

 Bill Williams has the opportunity to invest in project A that costs

$ 5 comma 300$5,300

today and promises to pay

$ 2 comma 200$2,200​,

$ 2 comma 400$2,400​,

$ 2 comma 400$2,400​,

$ 2 comma 100$2,100

and

$ 1 comma 800$1,800

over the next 5 years. ​ Or, Bill can invest

$ 5 comma 300$5,300

in project B that promises to pay

$ 1 comma 600$1,600​,

$ 1 comma 600$1,600​,

$ 1 comma 600$1,600​,

$ 3 comma 500$3,500

and

$ 4 comma 100$4,100

over the next 5 years.  

​(​Hint:

For mixed stream cash​ inflows, calculate cumulative cash inflows on a​ year-to-year basis until the initial investment is

recovered.​)

a.  How long will it take for Bill to recoup his initial investment in project​ A?

b.  How long will it take for Bill to recoup his initial investment in project​ B?

c.  Using the payback​ period, which project should Bill​ choose?

d.  Do you see any problems with his​ choice?

Answer 1

d. The problem of using payback period as a criterion is it does not consider time value of money ,it only uses exact cash flow occurs over the life of project.

Another major problem with this method is it does not consider cash flows of entire life of project.