De Luca Company is considering two possible investments, each of which requires an initial investment of $12,000.
Question:
De Luca Company is considering two possible investments, each of which requires an initial investment of $12,000. Investment A will provide a cash flow of $3,000 at the end of each year for 4 years. Investment B will provide a cash flow of $2,000 at the end of each year for 10 years.
1. Determine the payback period for each investment. Which investment is most desirable using the payback method?
2. Compute the NPV of each investment using a desired rate of return of 5 percent. Which investment is most desirable using the NPV method?
3. Explain why the payback method does not lead to an optimal decision for the De Luca Company.
Payback PeriodPayback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
1 Investment A payback period 12000 3000 4 years Investment B payback period 12000 2000 ...View the full answer
Management Accounting
ISBN: 978-0132570848
6th Canadian edition
Authors: Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu
