# Accounting

posted by .

Assume a \$4000 investment and the following cash flows for two alternatives. Under the payback method, which of the following would be concluded?
a. Investment X should be selected
b. Investment Y should be selected
c. Investment X and Y provide the same payback period
d. Neither investment is acceptable under the payback method

• Finance Management -

Investment X:
You need \$200 more to recoup your initial investment of \$4000, which you can get from the third year cash flow of \$3700.
You only need the pro-rata amount, which will be \$200/\$3700 = 0.054 year

Pay back period for X = 2.054 years

Investment Y:
You need only \$2700 from second year to recoup your initial investment of \$4000.
You only need the pro-rata amount, which will be \$2700/\$2800 = 0.964 year

Pay back period for Y = 1.964 years

Investment Y is a better choice based on payback method alone

Payback period is the amount of time required for an investment to generate cash flows to recoup its initial investment.
An investment is acceptable if its calculated payback is less than prescribed number of years for the said company.

Payback period suffer from some of the following disadvantages:
It ignore the time value of money
It determines to accept or reject projects on an ad hoc basis.
It ignore the cash flow beyond the cut-off period
Its biased against an long term project as compared to a short term.
Other methods such as NPV and IRR take into consideration the time value of money and risk involved in the project by discounting future cash flows.

• Accounting -

a 10 year zero coupon bond that yield 5% is issued with a 1000 par value. w hat is the issuance price of the bond

## Similar Questions

1. ### Finance

Assume a \$4,000 investment and the following cash flows for two alternatives. Year Investment X Investment Y 1 \$1,000 \$1,300 2 800 2,800 3 700 100 4 1,900 5 2,000 a. Under the payback method, which investment should be chosen?
2. ### statistics

You have available five different investment strategies and their respective payoffs for various states-of-nature as shown in the chart below. Which investment would you make under the different decision criteria?
3. ### Decision Criteria

You have available five different investment strategies and their respective payoffs for various states-of-nature as shown in the chart below. Which investment would you make under the different decision criteria?
4. ### Statistics

You have available five different investment strategies and their respective payoffs for various states-of-nature as shown in the chart below. Which investment would you make under the different decision criteria?
5. ### Math

You have available five different investment strategies and their respective payoffs for various states-of-nature as shown in the chart below. Which investment would you make under the different decision criteria?
6. ### College math HELP!!!!!

A financier plans to invest up to \$450,000 in two projects. Project A yields a return of 10% on the investment, whereas Project B yields a return of 15% on the investment. Because the investment in Project B is riskier than the investment …
7. ### Probability and Linear Math

SET UP BUT DO NOT SOLVE THE FOLLOWING LINEAR PROGRAMMING PROBLEM. A financier plans to invest up to \$500,000 in two products. Project A yields a return of 10% on an investment, whereas Project B yields a return of 15% on the investment. …
8. ### Math

A financier plans to invest up to \$500,000 in two projects. Project A yields a return of 11% on the investment of x dollars, whereas Project B yields a return of 17% on the investment of y dollars. Because the investment in Project …
9. ### math

A financier plans to invest up to \$500,000 in two projects. Project A yields a return of 8% on the investment of x dollars, whereas Project B yields a return of 13% on the investment of y dollars. Because the investment in Project …
10. ### math

A financier plans to invest up to \$500,000 in two projects. Project A yields a return of 8% on the investment of x dollars, whereas Project B yields a return of 13% on the investment of y dollars. Because the investment in Project …

More Similar Questions

Post a New Question