Bill Williams has the opportunity to invest in Project A that costs $9,000 today and promises to pay annual end-of-year 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?