Stallone Company is considering two possible investments, each of which requires an initial investment of $36,000. Investment
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Stallone Company is considering two possible investments, each of which requires an initial investment of $36,000. Investment A will provide a cash flow of $4,000 at the end of each year for 20 years. Investment B will provide a cash flow of $4,500 at the end of each year for 8 years.
1. Determine the payback period for each investment. Which investment is most desirable using the payback method?
2. Compute the NPV of each investment using a required rate of return of 8%. Which investment is most desirable using the NPV method?
3. Explain why the payback method does not lead to an optimal decision for the Stallone Company.
Payback PeriodPayback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Related Book For
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta
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