Question: Weaknesses of the Payback Model 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.