Question

Payback Period Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $360,000. The cash flow patterns for each project are given below. Storage facility: Even cash flows of $120,000 per year Car wash: $112,500, $142,500, $60,000, $120,000, and $90,000 Required: 1. Calculate the payback period for the storage facility (even cash flows). years 2. Calculate the payback period for the car wash facility (uneven cash flows). Round your answer to three decimal places. years Which project should be accepted based on payback analysis

Answer 1

Answer:

1. 3 years

2. 3.375 years

3. The storage facility project

Explanation:

The payback period measures how long it takes for the amount invested in a project to be recouped from cummulative cash flows.

When there are more than 1 project to be chosen from, the project whose payback period is the least should be chosen.

Therefore, the storage facility project should be chosen.

Explanations on how the payback period is calculated can be found in the attached images. Please contact me if you need clarification.

I hope my answer helps you.