A company is considering two capital investments. Each requires an initial investment of $15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. Investment B has the following expected cash flows: Year 1: $8,000; Year 2: $6,000; Year 3: $4,000; Year 4: $2,000; Total cash flows: $20,000. Using the payback period as the evaluation method, which investment should be chosen by management

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Parrain Parrain · Answer 1 · 2022-06-08T14:02:23+02:00

Based on the cashflows from each investment, the investment that should be chosen based on the payback period is Investment B.

This can be found as:

= Investment / Annual cash inflow

= 15,000 / 5,000

= 3 years

= Year before payback + Amount left to be paid / Cash inflow in year of payback

= 2 + (15,000 - 8,000 - 6,000) / 4,000

= 2 + 1,000 / 4,000

= 2.25 years

The company should pick Investment B as it pays back sooner than Investment A.

Find out more on Payback period at https://brainly.com/question/23149718.

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