Reference no: EM133434249
Long-term investment decision, payback method
Bill Williams has the opportunity to invest in project A that costs $9,000 today and promises to pay annual end-ofyear payments of $2,200, $2,500, $2,500, $2,000, and $1,800 over the next 5 years. Or, Bill can invest $9,000 in project B that promises to pay annual end-of-year payments of $1,500, $1,500, $1,500, $3,500, and $4,000 over the next 5 years.
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 period, which project should Bill choose?
d. Do you see any problems with his choice?
P10-10 NPV-Mutually exclusive projects
Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm's cost of capital is 15%.