Question

Assume a $72,000 investment and the following cash flows for two alternatives.

Year	Investment X			Investment Y
1		$22,000			$32,000
2		20,000			25,000
3		25,000			20,000
4		10,000			—
5		30,000			—

a. Calculate the payback for investment X and Y. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
  

Investment X		Years
Investment Y		Years

Answer 1

X:

Year	Cash flows	Cumulative Cash flows
0	(72000)	(72000)
1	22000	(50000)
2	20000	(30000)
3	25000	(5000)
4	10000	5000
5	30000	35000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(5000/10000)

=3.5 years

Y:

Year	Cash flows	Cumulative Cash flows
0	(72000)	(72000)
1	32000	(40000)
2	25000	(15000)
3	20000	5000

Hence payback=2+(15000/20000)

=2.75 years.