Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows: Year Project A Project B 1 $5,000,000 $20,000,000 2 $10,000,000 $10,000,000 3 $15,000,000 $8,000,000 4 $20,000,000 $6,000,000 a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. b) Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used.
Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows: Year Project A Project B 1 $5,000,000 $20,000,000 2 $10,000,000 $10,000,000 3 $15,000,000 $8,000,000 4 $20,000,000 $6,000,000 a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. b) Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:
|
Year |
Project A |
Project B |
|
1 |
$5,000,000 |
$20,000,000 |
|
2 |
$10,000,000 |
$10,000,000 |
|
3 |
$15,000,000 |
$8,000,000 |
|
4 |
$20,000,000 |
$6,000,000 |
- a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake.
- b) Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used.
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