Chinook Industries Inc. is evaluating two capital investment proposals for a ret
ID: 2430891 • Letter: C
Question
Chinook Industries Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $180,000 and each with an eight-year life and expected total net cash flows of $360,000. Location 1 is expected to provide equal annual net cash flows of $45,000, and Location 2 is expected to have the following unequal annual net cash flows: Year 1 $81,000 Year 2 61,000 Year 3 38,000 Year 4 58,000 Year 5 43,000 Year 6 32,000 Year 7 25,000 Year 8 22,000 Determine the cash payback period for both location proposals. Location 1 years Location 2 years
Explanation / Answer
Payback period = initial investment / annual net cash inflow
Location 1:
Initial investment = 180000
Annual net cash inflow = 45000
Payback period = 180000/45000 = 4 years
Location 2:
Year
Investment
Cash flow
Net cash flow
0
180000
0
-180000
1
0
81000
-99000
2
0
61000
-38000
3
0
38000
0
4
0
58000
+58000
5
0
43000
+101000
6
0
32000
+133000
7
0
25000
+158000
8
22000
+180000
Payback period = 3 years
Year
Investment
Cash flow
Net cash flow
0
180000
0
-180000
1
0
81000
-99000
2
0
61000
-38000
3
0
38000
0
4
0
58000
+58000
5
0
43000
+101000
6
0
32000
+133000
7
0
25000
+158000
8
22000
+180000
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