Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $6,200 today and promises to pay $2,100, $2,500, $2,500, $2,000 and $1,700 over the next 5 years. Or, Bill can invest $6,200 in project B that promises to pay $1,600, $1,600, $1,600, $3,600 and $3,900 over the next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.) a. How long will it take for Bill to recoup his initial investment in project A? b. How long will it take for Bill to recoup his initial investment in project B? c. Using the payback period, which project should Bill choose? d. Do you see any problems with his choice?

Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $6,200 today and promises to pay $2,100, $2,500, $2,500, $2,000 and $1,700 over the next 5 years. Or, Bill can invest $6,200 in project B that promises to pay $1,600, $1,600, $1,600, $3,600 and $3,900 over the next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.) a. How long will it take for Bill to recoup his initial investment in project A? b. How long will it take for Bill to recoup his initial investment in project B? c. Using the payback period, which project should Bill choose? d. Do you see any problems with his choice?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 15E

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Concept explainers

Cash Flow Statement Analysis

A company's cash flow is the movement of its cash inflows and cash outflows. A cash flow statement is prepared to determine changes in an organization's cash position. A cash flow statement shows how much money was generated and spent on the business during the fiscal year. The cash flow analysis is a method of analyzing an organization's investing, financing, and operating activities. A cash flow statement reveals an organization's liquidity and solvency, as well as its ability to change cash flows in the future. It eliminates the other effects of accounting methods by improving the comparability of different organizations' operational performance.

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Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $6,200 today and promises to pay
$2,100, $2,500, $2,500, $2,000 and $1,700 over the next 5 years. Or, Bill can invest $6,200 in project B that promises to pay $1,600, $1,600, $1,600, $3,600 and $3,900 over the
next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.)
a. How long will it take for Bill to recoup his initial investment in project A?
b. How long will it take for Bill to recoup his initial investment in project B?
c. Using the payback period, which project should Bill choose?
d. Do you see any problems with his choice?
a. For Bill to recoup his initial investment in project A, it will take
years. (Round to two decimal places.)

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