Answer: That they are risky
Explanation:
Bonds tend to give a low return compared to other investments such as stocks which is because they offer a constant payout. However even with bonds there will still be those that promise a higher return than the others and this is because they are riskier.
Bonds are debt instruments which means that the rate they pay is directly related to the risk attached. This is because the interest payment is meant to compensate you for the risk you are taking by getting that bond.
If the yield/return is high it would therefore follow that the risk Is high as well. Your Grandfather should therefore be aware of this risk before investing because riskier bonds might not pay back.
On January 1, Parson Freight Company issues 9.0%, 10-year bonds with a par value of $3,400,000. The bonds pay interest semiannually. The market rate of interest is 10.0% and the bond selling price was $3,168,967. The bond issuance should be recorded as:
Answer:
January 1
Cash $3168967 Dr
Discount on Bonds Payable $231033
Bonds Payable $3400000 Cr
Explanation:
The issuance of bond on January 1 is at a discount as the coupon rate paid by the bond is less than the market interest rate. In such case the bond is issued at a lower value than its par/face value. The discount on bonds payable is the difference between the face value and the cash received on issuance.
The entry to record the issues include a debit to cash account as cash is received, a debit to the discount on bonds payable account for the amount of discount and a credit to bonds payable account as liability is created as a result of the issuance of the bonds.
Discount = 3400000 - 3168967 = 231033
The risk-free rate is 2.3 percent and the market expected return is 12 percent. What is the expected return of a stock that has a beta of .87?
Answer:
The expected return = 10.739.
Explanation:
Given risk-free rate of return = 2.3 per cent
Market expected return = 12 percent
The value of beta = 0.87
Use the below formula to find the expected return.
The expected return = Risk free rate of return + Beta × (Market expected return - risk free rate of return)
The expected return = 2.3 + 0.87 (12 – 2.3)
The expected return = 10.739
Each extra worker produces an extra unit of output up to six workers. After six, no additional output is produced. Draw the total product of labor, average product of labor, and marginal product of labor curves.
Answer:
attached is the diagram
Explanation:
Each extra worker produces an extra unit of output, is said to be the marginal production of an extra worker employed
marginal production :
change in total production / change in labor = ΔTp / ΔL
Average production = Tp / L
Tp = total production , L = number of labor
To draw the Total product of labor , average product labor and marginal product labor curves starting from zero labor
0 worker : Total product = 0, average product labor = 0 , marginal = 0
1 worker : Total product = 1, average product = 1 , marginal = 0
2 worker : Total product = 2, average product = 1, marginal = 1
3 workers: total product = 3 average product = 1, marginal = 1
4 workers: Total product = 4, average product = 1, marginal = 1
5 workers : Total product = 5 average product = 1, marginal = 1
6 workers : total product = 6 average product = 1 , marginal = 1
7 workers : total product = 7 , average product = 0.85, marginal = 0
8 workers : total product = 8, average product = 0.75 marginal = 0
How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?
Answer:
Interest earn= $80.14
Explanation:
Giving the following information:
PV= $1,000
i= 7%
n= 3
First, we will calculate the future value at the second year:
FV= PV*(1+i)^n
FV= 1,000*(1.07^2)
FV= 1,144.9
Now, for the third year:
FV= 1,144.9*1.07= 1,225.04
Interest earn= 1,225.04 - 1,144.9= $80.14
Consider a $1,000-par-value 20-year zero-coupon bond issued at a yield to maturity of 10%. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for the first year of that bond is
Answer:
$14.87
Explanation:
Computation the imputed interest income for the first year of the bond
First step
Using this formula
Imputed interest income= Par value/(1+yield to maturity)^Numbers of years
Let plug in the formula
Imputed interest income$1,000/(1.10)^20
Imputed interest income= $1,000/6.72749
Imputed interest income=$148.64
Second step
Imputed interest income=$1,000/(1.10)^19= Imputed interest income=$1,000/6.11590
Imputed interest income=$163.51
Hence,
Imputed interest income=$163.51 - $148.64
Imputed interest income= $14.87
Therefore the imputed interest income for the first year of the bond will be $14.87
Your friend asked you what a business cycle means. You tell them that a business cycle reflects changes in real GDP. Then you tell them that the stages of a business cycle in correct order are:
Answer:
Growth, Boom, Recession and the Slump
Explanation:
Growth, Boom, Recession and the Slump.
Some books include the recovery but it is just counted included in the growth.
HOPE THIS HELPED
Crane Corporation has 2,000 shares of stock outstanding. It redeems 500 shares for $370,000 when it has paid-in capital of $300,000 and E & P of $1,200,000. The redemption qualifies for sale or exchange treatment for the shareholder. Crane incurred $13,000 of accounting and legal fees in connection with the redemption transaction and $18,500 of interest expense on debt incurred to finance the redemption. What is the effect of the distribution on Crane Corporation's E & P? Also, what is the proper tax treatment of the redemption expenditures?
Answer:
E&P $1,200,000 × 25%= $300,000 reduction
Crane Corporation would reduce its E & P in the amount of $300,000 as a result of the redemption.
This represents a 25% decrease in the amount of the E & P corresponding to the 25% stock redemption.
When a stock redemption results in sale or exchange treatment for the shareholder, the E & P account of a corporation is reduced in an amount not in excess of the ratable share of the E & P of the distributing corporation attributable to the stock redeemed.
As such, none of the expense of $13,000 of accounting and legal fees or other is deductible.
The GoT cups are a fast seller and you need to ensure that you have enough rolls of paper to fulfill demand. The first stage in the process is to determine the total cost of the current inventory ordering model. Given the following information, how many rolls should they order to minimize costs?H: $1.75 per unitD: 500 rolls per monthQ: 100 units ordered at a timeS: $25 per order
Answer:
EOQ = 414 rolls
Explanation:
In order to calculate the number of orders to minimize the cost, we should calculate that by using the Economic order quantity model.
DATA
Holding cost = $1.75/unit
Annual demand = 500 rolls x 12 = 6000 rolls
Ordering cost = $25
Formula
EOQ =[tex]\sqrt{\frac{2Cod}{Ch} }[/tex]
Where
Co = ordering cost
D = Annual demand
Ch = Holding cost
Solution
EOQ = [tex]\sqrt{\frac{2(6000)(25)}{1.75} }[/tex]
EOQ = [tex]\sqrt{\frac{300000}{1.75} }[/tex]
EOQ = 414 rolls
They should order 414 rolls to minimize the cost.
Answer:
119 units
Explanation:
The economic order quantity is the minimum amount of inventory that a seller must keep to demand and lower the holding cost. The ordering cost is $25 per order. Holding cost is $1.75 per unit. The total demand is 500 units per month. The economic order quantity that will minimize the cost of the GoT cups is
EOQ = [tex]\sqrt{\frac{2*Demand*ordering cost}{Holding cost} }[/tex]
EOQ is 119 units.
Kennywood Inc., a manufacturing firm, is able to produce 1,500 pairs of pants per hour, at maximum efficiency. There are three eight−hour shifts each day. Due to unavoidable operating interruptions, production averages 850 units per hour. The plant actually operates only 28 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 504,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 516,000. Assume the month has 30 days. What is the theoretical capacity for the month?
Answer:
1,080,000 units
Explanation:
Given the below information;
Theoretical capacity per hour = 1,500 units per hour
Hours per shift = 8 hours
Number of shift in each day = 3
Number of days per month = 30
Theoretical capacity for the month
= Theoretical capacity per hour × number of shift per day × hours per shift/day × number of days in a month
= 1,500 × 3 × 8 × 30
= 1,080,000 units
Bow-Wow Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $70 each in a foreign market which would not affect its present sales. If the company has sufficient (excess) capacity to produce the additional units, acceptance of the special order would affect net income as follows:
a. Income would decrease by $4,000.
b. Income would increase by $4,000.
c. Income would increase by $70,000.
d. Income would increase by $20,000.
* Distinguish between Accounts Receivable and
Account Payable.
Explanation:
Accounts receivable is money owed to a company by its debtors.
Account payable amounts due to vendors or suppliers for goods or services received that have not been yet paid for.
Answer:
Accounts receivable are the amounts owed to a company by its customers. it is an asset to the company
accounts payable are the amounts that a company owes to its suppliers.it is a liability to the company
Explanation:
If income rises from $1,000 to $1,400 and consumption rises from $800 to $1,168, the marginal propensity to consume is __________ percent.
Answer:
The marginal propensity to consume is 92 percent.
Explanation:
Marginal propensity to consume (MPC) refers to the additional expenditure on consumption by consumer as a result of an in national income.
That is, MPC is a measure of the proportion or percentage of the additional income that goes consumption expenditure.
MPC can be calculated using the following formula
MPC = ΔC / ΔY ......................................... (1)
Where;
ΔC = Change in consumption = New consumption - Old consumption = $1,168 - $800 = $368
ΔY = Change in income = New income - Old income = $1,400 - $1,000 = $400
Substituting the values into equation (1), we have:
MPC = $368 / $400 = 0.92, or 92%
Therefore, the marginal propensity to consume is 92 percent.
John is considering purchasing a commercial building. His accountant is working with him to determine the property’s value to John. The initial cost of an investment property plus the cost of any additional improvements less qualified deductions represents the:
Answer:
Adjusted basis
Explanation:
Adjusted basis in accounting is used to calculate the net value of an asset. This is done by reducing depreciation deductions from the original value and adding capital expenses like cost of improvement.
This method is best used when there is need to get accurate gain and loss records, and for tax purposes.
In the given scenario John's accountant is using the adjusted basis when he calculates initial cost of an investment property plus the cost of any additional improvements less qualified deductions
What is the present value (PV) of an investment that pays $60,000 every year for four years if the interest rate is 9% APR, compounded quarterly?
Answer:
PV= $798,757.88
Explanation:
Giving the following information:
Cf= $60,000
i= 0.09/4= 0.0225
n= 4*4= 16
First, we need to calculate the future value using the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual cash flow
FV= {60,000*[(1.0225^16) - 1]} / 0.0225
FV= $1,140,323.89
Now, the present value:
PV= FV/(1+i)^n
PV= 1,140,323.89/(1.0225^16)
PV= $798,757.88
Systemic barriers to change occur because of conflicts between departments, conflicts arising from power relationships, and refusal to share information.
a. True
b. False
Answer:
a. True
Explanation:
This statement is true, as systemic barriers can occur in an organization whose information flow does not occur efficiently and effectively, which causes information noises that prevent departments or teams from receiving organizational information.
This barrier can be eliminated by establishing a more direct and integrated communication with all organizational sectors, in the form of announcements, murals, e-mail, etc.
Another way to solve this problem is by analyzing the design of the organizational structure and making adjustments if it is found that there are flaws that prevent the flow of information to flow normally.
Bing engaged Dill to perform personal services for $2,200 a month for a period of four months. The contract was entered into orally on July 1, 1984, and performance was to commence on September 1, 1984. On August 10, Dill anticipatorily repudiated the contract. As a result, Bing:
Answer:
Bing can immediately sue for breach of contract
Explanation:
Based on the scenario that is being described, Bing can immediately sue for breach of contract. Breaching a contract is when one party in a binding agreement fails to deliver according to the terms of the agreement. When Dill made an anticipatory repudiation, he basically stated that he does not intend to live up to the obligations of the contract that he had agreed to, therefore breaching the contract and becoming liable.
As the workforce becomes more diverse, why does performance appraisal become a more difficult process?
Answer:
Performance appraisal in a company with diverse workforce becomes difficult because of some cultural biases that may exist between the manager, who is doing the appraisal, and the diverse workforce. This problem becomes more acute if the manager is culturally biased and discriminatory by practise.
Explanation:
Company A can have a diverse workforce if it is made up of employees from culturally different places working together in the same workplace. Bias often arises due to human cultural nuisances. This becomes more obvious where managers are from some particular cultures while the employees are from mixed cultures. In such situations, the managers need to be retrained to enable them embrace cultural diversity in the workplace and in performance evaluation.
The key cause due to which the performance appraisal becomes problematic due to diversity in the workforce would be:
- Cultural bias
What is performance appraisal?
Performance appraisal is described as the process of reviewing the performances done by the employees in a particular organization to attain its goals and reward them accordingly.
When the workforce of a particular company or organization becomes exceedingly diverse, it becomes problematic to do performance appraisals.
The reason behind this is that this diversity gives rise to cultural biases and may result in discrimination.
Learn more about "Performance" here:
brainly.com/question/22735387
The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year. What is the economic order quantity for the XO-01
Answer:
EOQ = 200 units
Explanation:
We can easily calculate the Economic order quantity by putting values EOQ formula. All you need is the data for calculation.
DATA
Annual demand = 8,000
Ordering cost = $50
Holding cost = $20
EOQ =?
Formula
EOQ = [tex]\sqrt{\frac{2CoD}{Ch} }[/tex]
Where
Co = Ordering cost
D = Demand
Ch = Holding cost
Solution
EOQ = [tex]\sqrt{\frac{{2(50)(8000)} }{20}}[/tex]
EOQ = [tex]\sqrt{\frac{800000}{20} }[/tex]
EOQ = 200 units
Pressure tactics lead the other party to realize that the status quo is acceptable, and they make explicit the costs of not negotiating.
a. True
b. Fasle
Answer: b. False
Explanation:
Pressure tactics is described as to pressurize the other party to realize that the status quo is unacceptable, and they make the costs of not negotiating very explicit.
Pressure tactic is one of the influence tactics which focuses on using power by demanding compliance or using threats.
Hence, the given statement is false.
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by ________________
Water and Power Company (WPC) can borrow funds at an interest rate of 10.20% for a period of four years. Its marginal federal-plus-state tax rate is 45%. WPC's after-tax cost of debt is ______________ (rounded to two decimal places).
At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?
A. 4.02%
B. 4.47%
C. 3.58%
D. 5.14%
Answer:
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1 - tax rate).
Water and Power Company (WPC) can borrow funds at an interest rate of 10.20% for a period of four years. Its marginal federal-plus-state tax rate is 45%. WPC's after-tax cost of debt is = 10.20% x (1 - 45%) = 5.61%.
At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?
B. 4.47%
pre-tax cost of debt = bond's yield to maturity
approximate YTM = {120 + [(1,000 - 1,329.55)/15] / [(1,000 + 1,329.55)/2] = 98.03 / 1,164.775 = 0.08416 = 8.416%
approximate after tax cost of debt = 8.4% x (1 - 45%) = 4.62 = 4.62
since I used the approximate yield to maturity, my answer is not exact. That is why I have to look for the closest available option.
Burnett Corp. pays a constant $8.15 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price
Answer:
$52.91
Explanation:
With regards to the above, we will apply the dividend discount model to come up with the price for share.
Under the dividend discount model, the price for share represents the present value of all its future dividend discounted at the required rate of return.
Since the share has 12 annual equal dividend payments of 8.15 each year, while the required rate is 11%, we can apply the below annuity to arrive at the share price.
(8.15/0.11) × [ 1- 1.11^(-12) ] = $52.91
Therefore, the current share price is $52.91
An annuity provides for 30 annual payments. The first payment of 100 is made immediately and the remaining payments increase by 8 percent per annum. Interest is calculated at 13.4 percent per annum. Calculate the present value of this annuity.
Answer:
$1423.38
Explanation:
number of payments ( number of years )(n) = 30
first payment = $100
interest calculated at : 13.4 % = 0.134
increment rate : 8 percent = 0.08
we can calculate the present value using this Equation
= (p / (r-g)) * [1 - [(1+g)/(1+r)]^n ]
where :
p / (r-g) = 100 / (0.134 - 0.08 ) = $1852
[1 - ((1+g)/(1+r)]^n ) = (1 - ((1.08/1.134)^30 ) = 0.7686
hence the present value of this annuity = $1852 * 0.7686 = $1423.38
Note :
p ( first principal payment ) = $100
r ( calculated interest ) = 13.4% = 0.134
g ( increment interest ) = 8 % = 0.08
Longman Company manufactures shirts. During June, Longman made 1,900 shirts but had budgeted production at 2,150 shirts. Longman gathered the following additional data:
Variable overhead cost standard $0.80 per DLHr
Direct labor efficiency standard 4.50 DLHr per shirt
Actual amount of direct labor hours 8,620 DLHr
Actual cost of variable overhead $10,344
Fixed overhead cost standard $0.10 per DLHr
Budgeted fixed overhead $968
Actual cost of fixed overhead $1,033
Required:
a. Calculate the variable overhead cost variance.
b. Calculate the variable overhead efficiency variance.
c. Calculate the total variable overhead variance.
d. Calculate the fixed overhead cost variance.
e. Calculate the fixed overhead volume variance
Answer:
a. variable overhead cost variance- $3,448 Unfavorable
b. variable overhead efficiency variance- $ 56 unfavorable
c. total variable overhead variance - $3,504 Unfavorable
d. fixed overhead cost variance - $65 unfavorable
e. Fixed overhead volume variance -$ 112.5 unfavorable
Explanation:
Variable overhead rate variance $
8,620 hours should have cost (8,620 × $0.80) 6896
but did cost 10,344
Variable overhead rate variance 3,448 Unfavorable
Variable overhead rate variance =$3,448 unfavorable
Efficiency variance Hours
190 units should have taken (1,900 × 4.50 hrs) 8,550
but did take 8,620
Efficiency variance in hours 70 unfavorable
Standard rate × $0.80
Efficiency variance $ 56 unfavorable
Efficiency variance =$ 56 unfavorable
Total variable overhead= rate variance +efficiency
Total variable overhead = $3,448 UF + $ 56 UF = $3,504 U
Total variable overhead = $3,504 Unfavorable
Fixed overhead cost variance
$
Budgeted cost 968
Actual cost 1,033
Fixed overhead cost Variance 65 unfavorable
Fixed Overhead Volume
Units
Budgeted units 2,150
Actual units 1,900
Variance 250
Standard fixed cost per unit (Notes) $0.45
Volume Variance 112.5 unfavorable
Standard fixed overhead cost per unit
= standard hours × standard Fixed overhead rate = 4.5 × $0.1= $0.45
a. variable overhead cost variance- $3,448 Unfavorable
b. variable overhead efficiency variance- $ 56 unfavorable
c. total variable overhead variance - $3,504 Unfavorable
d. fixed overhead cost variance - $65 unfavorable
e. Fixed overhead volume variance -$ 112.5 unfavorable
To determine cash payments for operating expenses for the statement of cash flows using the direct method, a decrease in accrued expenses is added to operating expenses other than depreciation.
a. True
b. False
Answer:
True
Explanation:
To determine cash payments under direct method the decrease in accrued expenses is added to the operating expenses payable . Accrued expense mean expenses incurred but not yet paid. A decrease in accrued expenses would suggest that accrued expenses have been paid therefore there has been an outflow of cash which will be added to cash paid for operating expenses.
Prepare the journal entry to record Jevonte Company’s issuance of 35,000 shares of its common stock assuming the shares have a: $3 par value and sell for $22 cash per share. $3 stated value and sell for $22 cash per share.
Answer: Please see answer in explanation column
Explanation:
a)journal entry to record Jevonte Company’s issuance at $3 par value and $22 cash per share
Account Debit Credit
Cash(35,000 x $22) $770,000
Common stock, $3 par value(35,000 x 3) $105, 000
Paid-in captial in excess of par value, common stock
($770,000 - $105, 000 ) $665,000
b)journal entry to record Jevonte Company’s issuance at $3 stated value and $22 cash per share
Account Debit Credit
Cash (35,000 x $22) $770,000
Common stock, $3 stated value (35,000 x 3) $105, 000
Paid-in captial in excess of stated value, common stock
($770,000 - $105, 000 ) $665,000
Janitor Supply produces an industrial cleaning powder that requires 31 grams of material at $0.30 per gram and 0.40 direct labor hours at $10.00 per hour. Overhead is applied at the rate of $16 per direct labor hour. What is the total standard cost for one unit of product that would appear on a standard cost card
Answer:
Total standard cost per unit will be $19.7
Explanation:
The standard cost card of the product will be,
$
Material (0.3 * 31) 9.3
Direct Labor (0.4 * 10) 4
Overheads (0.4 * 16) 6.4
Total cost per unit 19.7
Thus, the standard cost per unit will be $19.7
The NYSE Specialist (DMM) and Floor Trader system is the model for trading used by which of the following markets?
I NASDAQ
II AMEX (NYSE American)
III PHLX
IV BATS
a. I and III
b. I and IV
c. II and III
d. II and IV
Answer:
c. II and III
Explanation:
The New York Stock Exchange, NYSE Specialist (DMM) and Floor Trader system is the model for trading used by American Stock Exchange, AMEX (NYSE American) and Philadelphia Stock Exchange (PHLX).
However, National Association of Securities Dealers Automated Quotations (NASDAQ) isn't modeled after the NYSE Specialist (DMM) and Floor Trader system, rather it is based on an all electronic market. Also, Better Alternative Trading System (BATS) started as an Electronic Communications Network (ECN) and as such is typically an all electronic market, which has transformed magnificently into an exchange according to the Securities and Exchange Commission (SEC).
Hence, the American Stock Exchange, AMEX (NYSE American) and Philadelphia Stock Exchange (PHLX) uses a designated market maker (DMM) and Floor Trader system just like the New York Stock Exchange as their primary market maker.
what happens to aggregate output if both taxes and government spending are lowered by $300 billion and mpc
Answer:
The answer is:
1. consumers' expenditure increases by $150 billion
2. output will decrease by $600 billion
Explanation:
Tax impact:
$300 billion x 0.5
= $150 billion.
If taxes are lowered by $300 billion, consumers' expenditure increases by $150 billion because with lower tax, there is money money to be spent because their disposable income has increased.
Government spending impact:
$300/(1-0.5)
$300/0.5
=$600 billion.
Due to government spending that has increased by this amount, output will decrease by this amount too because government has directly competed with firms that should have used this money to increase the total output.
Therefore, net effect on total output is $300billion($600 - $300)
Martha, who is single, has a main home in Houston. In the current year, she rented it for 10 days, receiving $5,000 in rental income. Martha paid $20,000 in mortgage interest and $10,000 in real estate taxes on her home in the current year. What is the net effect of these items on her adjusted gross income g
Answer:
$5,000 increase
Explanation:
As Martha has the main home in Houston and in the current year she rented it for only 10 days, this means that house is rented for less than 14 days and will be still treated as her personal residence, therefore, no deduction will be available for Martha against her rental income. Martha's Adjusted gross income will be increased by an amount of $5,000.
Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $ 77,000 $ 55,000 Net cash flow: Year 1 28,000 2,000 Year 2 28,000 25,000 Year 3 28,000 25,000 Year 4 0 20,000 If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?
Answer: Project X
Explanation:
Payback period is a method of capital budgeting that judges a project's viability based on when it will be able to pay back the initial investment.
Payback period Project X
Cost of machines is $77,000
= Year 1 + Year 2 + Year 3
= 28,000 + 28,000 + 28,000
= $84,000
Means it paid back within 3 years.
= Year + Year 2
= 28,000 + 28,000
= $56,000
At year 2 how much was left;
= 77,000 - 56,000
= 21,000
= Amount left/ amount paid in year
= 21,000/28,000
= 0.75
= 2 years + 0.75 years
It took 2.75 years to pay off the Project X
Payback period Project Y
Cost of machines is $55,000
= Year 1 + Year 2 + Year 3
= 2,000 + 25,000 + 25,000
= $52,000
Means it did not payback within 3 years.
In 4th year
= 55,000 - 52,000
= $3,000
= 3,000/20,000
= 0.15
It took 3 years + 0.15 year = 3.15 years to pay off.
Project X should be selected as it pays back within 3 years.