Question

Cash Payback Period for a Service Company Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $200,000 and each with an eight-year life and expected total net cash flows of $320,000. Location 1 is expected to provide equal annual net cash flows of $40,000, and Location 2 is expected to have the following unequal annual net cash flows:
Year 1 $60,000 Year 5 $30,000
Year 2 50,000 Year 6 30,000
Year 3 50,000 Year 7 30,000
Year 4 40,000 Year 8 30,000

Determine the Cash Paybck period for both location proposals.

Answer 1

Answer:

Location 1 = 5 years

Location 2  = 4 years

Explanation:

The period in which initial investment is recovered by a business is known as payapack period.

Location 1

Net cash flow = $320,000

Cash Flow per year = $320,000 / 8 = $40,000

Payback period = Initial Investment / Yearly cash flow = $200,000 / $40,000 per year = 5 years

Location 2

As per given Data

Cash Flows

Year1 $60,000    Year2 $50,000

Year3 $50,000     Year4 $40,000

Year5 $30,000    Year6 $30,000

Year7 $30,000    Year8 $30,000

Payback period                  Balance      

Year0 ($200,000)            ($200,000)    

Year1 $60,000                  ($140,000)

Year2 $50,000                 ($90,000)

Year3 $50,000                  ($40,000)

Year4 $40,000                     ($0)

It took 4 year to recoveer the initial investment, so the payaback period is 4 years.