Question

Assume a $100,000 investment and the following cash flows for two alternatives. Year Investment A Investment B 1 $ 30,000 $ 45,000 2 35,000 30,000 3 25,000 50,000 4 20,000 — 5 15,000 — a. Calculate the payback for investment A and B. (Round your answers to 2 decimal places.)

Answer 1

Inv A
Year	Cash flow stream	Cumulative cash flow
0	-100000	-100000
1	30000	-70000
2	35000	-35000
3	25000	-10000
4	20000	10000
5	15000	25000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 3 and 4

therefore by interpolation payback period = 3 + (0-(-10000))/(10000-(-10000))

3.5 Years

Inv B
Year	Cash flow stream	Cumulative cash flow
0	-100000	-100000
1	45000	-55000
2	30000	-25000
3	50000	25000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-25000))/(25000-(-25000))

2.5 Years