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Payback method

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Assume a $40,000 investment and the following cash flows for two alternatives.

Year Investment X Investment Y
1 $ 6,000 $15,000
2 8,000 20,000
3 9,000 10,000
4 17,000
5 20,000

Which of the alternatives would you select under the payback method? Why?

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Solution Summary

This solution explains how to determine the acceptance or rejection of an investment using the payback method.

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Using the payback period, we select projects which have a payback that is less than the cut-off payback. If there is no cut-off there then we select a project with a lower payback since it means that the initial ...

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