Question

Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs

$7,700

today and promises to pay

$2,100 ,

$2,600 ,

$2,600 ,

$1,900

and

$1,800

over the next 5 years. Or, Bill can invest

$7,700

in project B that promises to pay

$1,500 ,

$1,500 ,

$1,500 ,

$3,500

and

$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