Question - Bailey Airline Company is considering expaniding their territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $9,000,000; it will enable the company to increase its annual cash inflow by $3,000,000 per year. The plane is expected to have useful life of five years and no salvage value. The second plane costs $18,000,000; it will enable the company to increase annual cash flow by $4,500,000 per year. This plane has an eight- year useful life and a zero salvage value.
A- Determine the payback period for each investment alternative and identify the alternative Bailey should accept if the decision is based on the paycheck approach.
B- Discuss the shortcoming of using the payback method to evaluate investment opportunities.