Question

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.

Short answer

Rank	Project
1	A
2	C
3	B

Step-by-step solution

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.

Ranking of projects

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