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Question 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 work/calculations for each investment).

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

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Solution Summary

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 work/calculations for each investment).

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

Solution Preview

a. Under the payback method, which investment should be chosen? (Show work/calculations for each investment).

The payback period is the amount of time that it takes for the invested money to generate enough cash flow to the point that we can recoup our initial investment.

Investment X: $1000+$2800 = $3800. You need an additional $200 to the initial investment of $4000, which you receive ...

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