Question
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
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 |
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2017 |
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2018 |
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2019 |
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2020 |
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2021 |
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