2. Determine the payback period of the two alternatives with cash flows tabulated below, Year Alternative A Alternative B -1000 -2783 1 200 1200 2 200 1200 3 200 1200 4 200 1200 200 1200
2. Determine the payback period of the two alternatives with cash flows tabulated below, Year Alternative A Alternative B -1000 -2783 1 200 1200 2 200 1200 3 200 1200 4 200 1200 200 1200
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Provide complete solution, the answer must be negative (-)
Transcribed Image Text:**Payback Period Analysis for Two Investment Alternatives**
*Objective: Determine the payback period of two investment alternatives based on the cash flows provided.*
**Cash Flow Table:**
| Year | Alternative A | Alternative B |
|------|---------------|---------------|
| 0 | -1000 | -2783 |
| 1 | 200 | 1200 |
| 2 | 200 | 1200 |
| 3 | 200 | 1200 |
| 4 | 200 | 1200 |
| 5 | 200 | 1200 |
**Explanation:**
- **Initial Investment (Year 0):**
- Alternative A requires an initial outlay of -1000.
- Alternative B requires a larger initial outlay of -2783.
- **Annual Cash Inflows (Years 1-5):**
- For Alternative A, the annual cash inflow is 200.
- For Alternative B, the annual cash inflow is significantly higher at 1200.
**Analysis Steps:**
1. **Calculate the cumulative cash flow for each alternative until the initial investment is recovered.**
2. **Alternative A:**
- Year 1: -1000 + 200 = -800
- Year 2: -800 + 200 = -600
- Year 3: -600 + 200 = -400
- Year 4: -400 + 200 = -200
- Year 5: -200 + 200 = 0
*Payback period for Alternative A is 5 years.*
3. **Alternative B:**
- Year 1: -2783 + 1200 = -1583
- Year 2: -1583 + 1200 = -383
- Year 3: -383 + 1200 = 817
*Payback period for Alternative B is 3 years (occurring within the third year).*
**Conclusion:**
- Alternative B recovers its initial investment faster than Alternative A, making it a potentially more attractive option if the criterion for selection is a shorter payback period.
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