Question

Nubela Manufacturing is considering two alternative investment proposals with the following​ data: Proposal X Proposal Y Investment ​$10,700,000 ​$580,000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years ​$2,140,000 ​$103,000 Residual value ​$50,000 ​$26,000 Depreciation method Straightminusline Straightminusline Required rate of return ​12% ​13% Calculate the payback period for Proposal X.

Answer 1

Answer:

Payback period =  4 years  11.72 months

Explanation:

The payback period is the estimated length of time in years it takes  

the net cash inflow from a project to equate and recoup the the initial cost  

Where a project is expected to generate a series of equal annual net cash inflow, the payback period can be calculated as:

Payback period =The initial invest /Net cash inflow per year

Payback period for project X

Cumulative net cash inflow for 4 years

=$2,140,000× 4 = $8,560,000

Cash in flow in year 5 = annual cash inflow + scrap value

                     2,140,000 +  50,000= $2,190,000

Payback period = 4 years  + (10,700,000-8,560,000 )/2,190,000 × 12 months

                          = 4 years  11.72 months

Payback period for project X= 4 years  11.72 months