Exercise 4-1

The management of Redlands, Inc. only considers investing in projects that pay for themselves within four years. The investment committee is currently screening three potential investments at the end of 2015 for use beginning in 2016. The cash flow data for each is as follows:

Investment	Cost	Additional Cash Outflow	Cash Inflow
A	$200	none	$60 annuity for 5 years
B	150	$10 in 2016; $10 in 2017	$40 annuity for 6 years
C	300	$20 annuity	$70 in 2016; $90 in 2017; $110 in 2018; $100 in 2019; $70 in 2020

Required:

a.Use the payback period method and the templates below to determine which of the three projects Redlands should consider for investment purposes.

b.Explain why the firm might not use the payback period method to make a final determination on which projects to invest in.

/------Investment A-------/ /------Investment B-------/ /------Investment C-------/

Year End	Cash Flow	Cumulative Total	Cash Flow	Cumulative Total	Cash Flow	Cumulative Total
2015	($200)	($200)	($150)	($150)	($300)	($300)
2016
2017
2018
2019
2020
2021