Answer:
The correct answer is 2.7 years for plane 1 and 4 years for plane 2.
Plane 1 should be accepted.
Explanation:
According to the scenario, the computation of the given data are as follows:
Plane 1 Cost = $15,660,000
Annual cash inflow = $5,800,000
Plane 2 cost = $34,400,000
Annual cash inflow = $8,600,000
So, we can calculate the payback period by using following formula:
Payback period = cost ÷ Annual cash flow
So, For Plane 1 = $15,660,000 ÷ $5,800,000 = 2.7 years
For plane 2 = $34,400,000 ÷ $8,600,000 = 4 years
As, Plane 1 has less payback period so it should be accepted.
