Question

# Assume a \$90,000 investment and the following cash flows for two alternatives. Year Investment A Investment...

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

 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

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