Question

Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: Year 1 $250,000 Year 2 200,000 Year 3 100,000 Year 4 50,000 Year 5 100,000 Year 6 20,000 $720,000 Determine the cash payback period for each proposal. Round your answers to two decimal places. Proposal L years Proposal K years

Answer 1

Answer: Project L = 3.53 years

Project K = 4 years

Explanation: Payback period can be defined as the period in which the company can recover its initial amount invested from the cash inflows of the project. We can calculate the payback period as follows :-

$Payback\:period=\frac{Initial\:cost}{cash\:inflows}$

.

therefore, payback period Project L :-

$Payback\:period=\frac{600,000}{170,000}$

= 3.53 years

.

payback period of project K :-

$Payback\:period=\frac{600,000}{250,000+200,000+100,000+50000}$

= 4years