Stoney Corporation invest $6,500 each in Projects X and Y. Cash flows from these investment are...
Stoney Corporation invest $6,500 each in Projects X and Y. Cash flows from these investment are listed below
Investment X Investment Y
Year 1 $1000 $1300
Year 2 1800 2000
Year 3 1700 1100
Year 4 2000 1500
Year 5 600
Calculate the payback in years for each project. Should you choose X or Y using the payback method?
Investment X should be selected.
Investment Y should be selected.
Investment X and Y provide the same payback period.
Homework Answers
Ans Investment X should be selected since payback period is less than the life of the project.
| INVESTMENT X | ||
| Year | Cash Flow | Cumulative Cash Flow |
| 0 | -6500 | -6500 |
| 1 | 1000 | -5500 |
| 2 | 1800 | -3700 |
| 3 | 1700 | -2000 |
| 4 | 2000 | 0 |
| 5 | 600 | 600 |
| TOTAL | 600 | |
| Payback Period = | 4 years | |
| INVESTMENT Y | ||
| Year | Cash Flow | Cumulative Cash Flow |
| 0 | -6500 | -6500 |
| 1 | 1300 | -5200 |
| 2 | 2000 | -3200 |
| 3 | 1100 | -2100 |
| 4 | 1500 | -600 |
| TOTAL | -600 | |
| Payback Period = | 0 | |
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