Investment A is recommended for Tumaini Ltd due to its shortest payback period of 3 years and good rate of return. The other investments have longer payback periods and thus present a slower recovery of the initial cost, which is crucial for a company with limited funds.
When analyzing the investment opportunities of Tumaini Ltd, we look at both the profitability and the payback period for each option. The payback period is particularly important when resources are limited, as it indicates how quickly the initial investment can be recovered.
- Investment A has an annual profit of 300,000 Sh., with a cost of 900,000 Sh. Its payback period is 3 years.
- Investment B also has an annual profit of 300,000 Sh., but with a higher cost of 1,600,000 Sh. Its payback period is approximately 5.33 years.
- Investment C has a slightly lower annual profit of 240,000 Sh. and a cost of 1,200,000 Sh., giving a payback period of 5 years.
- Investment D has the lowest annual profit of 180,000 Sh. and a cost of 800,000 Sh., resulting in a payback period of about 4.44 years.
Given Tumaini Ltd's limited investment budget, Investment A is recommended due to its shortest payback period and efficient utilization of capital. When considering other financial factors, one should factor in risk, potential growth, and economic conditions that could affect the returns of these investments.