Question

Stuart Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $24,420,000; it will enable the company to increase its annual cash inflow by $6,600,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $33,480,000; it will enable the company to increase annual cash flow by $9,300,000 per year. This plane has an eight-year useful life and a zero salvage value.
Required:
Required:1. Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)

Answer 1

Answer:

3.7 years and 3.6 years

Explanation:

The formula to compute the payback period is shown below:

= Initial investment ÷ Net cash flow

So, for the first airplane, the payback period is

= $24,420,000 ÷ $6,600,000

= 3.7 years

And for the second airplane, the payback period is

= $33,480,000 ÷ $9,300,000

= 3.6 years

We simply divided the initial investment by the net cash flow so that the payback period could come