Question

Assume a $90,000 investment and the following cash flows for two alternatives.

Year	Investment A			Investment B
1	$	30,000		$	30,000
2		25,000			30,000
3		20,000			40,000
4		30,000			—
5		25,000			—

a. Calculate the payback for investment A and B. (Round your answers to 2 decimal places.)
Investment A_________years

investment B___________years

b. Which investment would you select under the payback method?
  

	Investment A
	Investment B

c. If the inflow in the fifth year for Investment A was $25,000,000 instead of $25,000, would your answer change under the payback method?

	Yes
	No

Answer 1

a
Year	Investment A	Cummulative cash flow
1	30000	30000
2	25000	55000
3	20000	75000
4	30000	105000
5	25000	130000
Payback period = 3 years +(1 year *(90000-75000)/(105000-75000)
=	3.5	years
Year	Investment A	Cummulative cash flow
1	30000	30000
2	30000	60000
3	40000	100000
4		100000
5		100000
Payback period = 2 years +(1 year *(90000-60000)/(100000-75000)
=	3.2	Years
b
Investment B as it has lower payback period
c
No, as the recovery is done in 4th years 5th year cash flow doesnot effect