Assume a $80,000 investment and the following cash flows for two alternatives. Year Investment X Investment Y 1 $20,000 $40,000 2 25,000 30,000 3 20,000 15,000 4 25,000 - 5 20,000 - a. Calculate the payback for investment X and Y.

Instructions are below.

Explanation:

Giving the following information:

Io = - $80,000

Investment X:

Year 1 = $20,000

Year 2 = $25,000

Year 3 = $20,000

Year 4 = $25,000

Year 5 = $20,000

Investment Y:

1 = $40,000

2 = $30,000

3 = $15,000

The payback period is the number of years and days that takes to recover the initial investment.

Payback period Investment X:

Year 1 = 20,000 - 80,000 = - 60,000

Year 2 = 25,000 - 60,000 = - 35,000

Year 3 = 20,000 - 35,000 = - 15,000

Year 4 = 25,000 - 15,000 = 10,000

To calculate the days:

15,000/25,000 = 0.6*365 = 219 days

It will take 3 years and 219 days to recover the initial investment.

Payback period Investment Y:

Year 1 = 40,000 - 80,000 = - 40,000

Year 2 = 30,000 - 40,000 = - 10,000

Year 3 = 15,000 - 10,000 = 5,000

To calculate the days:

10,000/15,000 = 0.67*365 = 245 days

It will take 2 years and 245 days.