Cash Payback Period Primera Banco is evaluating two capital investment proposals

Question

Cash Payback Period

Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $325,000 and each with an eight-year life and expected total net cash flows of $520,000. Location 1 is expected to provide equal annual net cash flows of $65,000, and Location 2 is expected to have the following unequal annual net cash flows:

Determine the cash payback period for both location proposals.

years

Year 1 $146,000 Year 2 111,000 Year 3 68,000 Year 4 62,000 Year 5 47,000 Year 6 35,000 Year 7 27,000 Year 8 24,000

Explanation / Answer

Paybck period is a financial or capital budgeting ratio.That calculate the number of days required for an investment to produce cash flows equal to the original amount invested. Location 1 Initial Investment= 325000 Annual Net Cash Flow= 65000 Payback Period= Initial Investment/Annual Net Cash Flow 325000/65000= 5 Years Location 2 Cash Flow Cumulative Cash flow Year 1 146000 146000 Year 2 111000 257000 Year 3 68000 325000 Year 4 62000 387000 Year 5 47000 434000 Year 6 35000 469000 Year 7 27000 496000 Year 8 24000 520000 Payback period of location 2 is 3 years because the cumulative cash flow at the end of 3rd year becomes equal to its initial amount of investment. Location Payback Period Location 1 5 years Location 2 3 years

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