Question

Assume a $105,000 investment and the following cash flows for two alternatives.

Year	Investment A			Investment B
1	$	45,000		$	55,000
2		30,000			30,000
3		15,000			25,000
4		30,000			—
5		10,000			—

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

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 $10,000,000 instead of $10,000, would your answer change under the payback method?

	Yes
	No

Answer 1

	Year	Investment A	CUMULATIVE RETURN INVESTMENT A	Investment B	CUMULATIVE RETURN INVESTMENT A
	0	-105000	-105000	-105000	-105000
	1	45,000	-60,000	55,000	-50,000
	2	30,000	-30,000	30,000	-20,000
	3	15,000	-15,000	25,000	5,000
	4	30,000	15,000	—
	5	10,000	25,000	—
	TOTAL	25000		5000
Ans a)	Investment A
	PAYBACK PERIOD=	3 YEARS + 15000 /30000
		3.50 YEARS
	Investment B
	PAYBACK PERIOD=	2 YEARS + 20000/25000
		2.80 YEARS
Ans b)	Investment B
	Since it has lower payback period
Ans c)	No, answer will remain the same
	Payback period will not change since the amount has increased in Year 5.