Question

# assume a \$42,000 investment and the following cash flows for two alternatives. year.       investment x.       investment...

assume a \$42,000 investment and the following cash flows for two alternatives.

year.       investment x.       investment y
1.              \$15,000.                \$22,000
2.                14,000.                  15,000
3.                10,000.                  10,000
4.                15,000.                     ----
5.                20,000.                    ------

calculate the payback for investment x and y.

X:

 Year Cash flows Cumulative Cash flows 0 (42000) (42000) 1 15000 (27000) 2 14000 (13000) 3 10000 (3000) 4 15000 12000 5 20000 32000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(3000/15000)=3.2 years

Y:

 Year Cash flows Cumulative Cash flows 0 (42000) (42000) 1 22000 (20000) 2 15000 (5000) 3 10000 5000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(5000/20000)=2.5 years.

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