Share
Explore BrainMass

Payback methods and depreciation expense

Please see attached sheet for complete list of questions and details.
Year Investment X Investment Y
1 $1,000 $1,300
2 800 2,800
3 700 100
4 1,900
5 2,000
a. Under the payback method, which investment should be chosen? (Show your work/analysis/calculations for each investment).

Attachments

Solution Preview

1. Assume a $4,000 investment and the following cash flows for two alternatives.
Year Investment X Investment Y
1 $1,000 $1,300
2 800 2,800
3 700 100
4 1,900
5 2,000
a. Under the payback method, which investment should be chosen? (Show your work/analysis/calculations for each investment).
Payback period is the period in which the initial investments of the project is recovered. As per investopedia, All other things being equal, the better investment is the one with the shorter payback period.
Payback period of X=
We will calculate Cumulative cash flows:
Cumulative cash flows
Year 0= -4000
Year 1= -3000
Year 2= -2200
Year 3= -1500
Year 4= 400
Hence payback period is in between year 3 and 4 when cumulative cash flow is positive
Payback period= 3+1500/1900= 3.79 years

Payback period of Y=
We will calculate Cumulative cash flows:
Cumulative cash flows
Year 0= -4000
Year 1= -2700
Year 2= 100
Hence payback period is in between year 2 and 3when cumulative cash flow is ...

Solution Summary

Response helps in computing payback methods and depreciation expense

$2.19