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Q2SE

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 1465

Short Answer

S26-2 Using payback to make capital investment decisions

Carter Company is considering three investment opportunities with the following payback periods:

Project A

Project B

Project C

Payback period

2.7 years

6.4 years

3.8 years

Use the decision rule for payback to rank the projects from most desirable to least desirable, all else being equal.

Rank

Project

1

A

2

C

3

B

See the step by step solution

Step by Step Solution

Step 1: Definition of Capital Investment

The investment made by the business entity to acquire the fixed/plant assets to be employed in the business operations is known as capital investment.

Step 2: Ranking of projects

The payback period defines the period in which the project will repay the amount initially invested. Project A is given 1st rank because it will repay the amount at the earliest compared to other projects. At the same time, project B is provided with 3rd rank because it will repay the initial investment after 6.4 years which is higher than the other two projects.

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