Question

# Assume a \$72,000 investment and the following cash flows for two alternatives. year.          investment a.         investment...

Assume a \$72,000 investment and the following cash flows for two alternatives.

year.          investment a.         investment b
1.                  \$25,000.                 \$22,000
2.                    25,000.                   15,000
3.                    15,000.                   50,000
4.                    10,000.                    --------
5.                    30,000.                   ---------

calculate the payback for investment A and B

X:

 Year Cash flows Cumulative Cash flows 0 (72000) (72000) 1 25000 (47000) 2 25000 (22000) 3 15000 (7000) 4 10000 3000 5 30000 33000

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+(7000/10000)=3.7 years

Y:

 Year Cash flows Cumulative Cash flows 0 (72000) (72000) 1 22000 (50000) 2 15000 (35000) 3 50000 15000

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+(35000/50000)=2.7 years.

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