Question

Assume a $85,000 investment and the following cash flows for two alternatives.

Year	Investment A			Investment B
1	$	25,000		$	35,000
2		25,000			35,000
3		25,000			20,000
4		20,000			—
5		20,000			—

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 $20,000,000 instead of $20,000, would your answer change under the payback method?
  

	Yes
	No

Answer 1

B. Under payback investment B will be selected since it has a lower turnaround in terms of years

C.If in the year 5 the investment A is 20 million it will not change the answer (under payback method) since it well past the payback of 3.5 years i.e.Investment B will still be preferred option.