Problem 12-6 Payback method LO3 Assume a $250,000 investment and the following c

Question

Problem 12-6 Payback method LO3 Assume a $250,000 investment and the following cash flows for two products: ProductY $50,000 $80,000 $60,000 $70,000 Year ProductX $90,000 $90,000 $60,000 $20,000 a. Calculate the payback for products X and Y. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Which alternative would you select under the payback method? Input variables: $250,000 Investment amount Cash flows: Year 1 Year 2 Year 3 Year 4 Product X Product Y $90,000 90,000 60,000 20,000 $50,000 80,000 60,000 70,000 Solution and Explanation: Product X: Amount yet to be Recovered Cash flows Initial investment Year 1 Year 2 Year 3 Year 4

Explanation / Answer

a.

payback = 3 + 10,000/20,000 = 3.50 years

b.

Payback = 3 + 60/70 = 3.86 years

X has a shorter payback period

Cash flows Amount to be recovered         (250,000.00)                     (250,000.00)            90,000.000                     (160,000.00)            90,000.000                       (70,000.00)            60,000.000                       (10,000.00)            20,000.000                          10,000.00

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