Question
Long term investment decision, payback method - Bill Williams has the opportunity to invest in Project A that costs $5,100 today and promises to pay
Long term investment decision, payback method - Bill Williams has the opportunity to invest in Project A that costs $5,100 today and promises to pay $2,220, $2,500, $2,500, $1,900 and $1,900 over the next 5 years. Or Bill can invest $5,100 in Project B that promises to pay $1,300, $1,300, $1,300,$3,500 and $3,900 over the next 5 years (Hint: for mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered).
a. how long will it take for Bill to recoup his initial investment in project A.
b. how long will it take for Bill to recoup his initial investment in project B.
c. using the payback, which project should Bill choose?
d. do you see any problems with his choice?
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