Question

Instead of Model A and B, Jane is now considering Model X and Y as she learned that her budget envelope has increased to $15,000

	Model (C)	Model (X)	Model (Y)
Initial Cost	$7,500	$10,000	$12,500
Life (years)	4	4	4
Annual Savings	$2,500	$2,750	$7,000

22. Based on the Payback analysis, which of the above options are most attractive
    1. Model C or X
    2. Model Y
    3. Model X
    4. Can’t decide since they have different product life
    5. All three options are equally attractive

Answer 1

Payback Period ( When cash flows are equal) = Initial Investment / Annual Savings

Model C

Payback period = 7500 / 2500

= 3 Years

Model X

Payback period = 10000 / 2750

= 3.6363 Years

Model Y

Payback Period = 12500 / 7000

= 1.78571 Years

The Payback period measures how many years or period the cash flows will take to cover the initial investment. So, The Lower the payback period better it would be for the firm. So Model Y Should be Selected [Option B is the correcr]