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Under the payback method, which investment should be chosen?

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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?

b. Why do other methods allow for a better analysis?

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Solution Preview

Payback is the time taken to recover the initial investment. Under payback method we choose the investment with a shorter payback.
The initial investment is $4,000
Investment X - we ...

Solution Summary

This solution shows the steps for determining which of the given investments should be chosen under the payback method.

$2.19