Prime Financial Inc. is evaluating two capital investment proposals for a drive-

Question

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:

Determine the cash payback period for both location proposals.

Year 1 $90,000 Year 5 $29,000 Year 2 68,000 Year 6 22,000 Year 3 42,000 Year 7 17,000 Year 4 38,000 Year 8 14,000

Explanation / Answer

CASH PAYBACK PERIOD

LOCATION 1

=$200,000/$40,000

= 5 YEARS

LOCATION 2

PAYBACK PERIOD = Years before full recovery +unrecovered cost at the start of the year/cash flow during the year

= 2+($200,000-$158,000)/$42,000

=2+1

= 3 YEARS

YEAR CASH INFLOW CUMULATIVE CASHINFLOW 1 $90,000 $90,000 2 $68,000 $158,000 3 $42,000 $200,000 4 $38,000 $238,000 5 $29,000 $267,000 6 $22,000 $289,000 7 $17,000 $306,000 8 $14,000 $320,000

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