Primera Banco is evaluating two capital investment proposals for a drive-up ATM

Question

Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $255,000 and each with an eight-year life and expected total net cash flows of $408,000. Location 1 is expected to provide equal annual net cash flows of $51,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1 - $82,000

Year 2 - 61,000

Year 3 - 41,000

Year 4 - 33,000

ear 5 - 20,000

Year 6 - 18,000

Year 7 - 89,000

Year 8 - 64,000

Determine the cash payback period for both location proposals

years

Location 1

Explanation / Answer

Payback period For location 1 = Initial investment /Cash flow

                                                 = 255000/ 51000

                                                 = 5 years

Payback period = 6 years as cummulative cash flow is negative

year Location 1 Location 2 cash flow cummulative cash flow cash flow cummulative cash flow 0 -255000 -255000 -255000 -255000 1 51000 -204000   [-255000+51000] 82000 - 173000    [-255000+82000] 2 51000 - 153000   [-204000+51000] 61000 -112000     [-173000+61000] 3 51000 -102000    [ -153000+51000] 41000 -71000     [-112000+71000] 4 51000 - 51000     [-102000+51000] 33000 -38000     [-71000+33000] 5 51000 0      [ -51000+51000] 20000 -18000    [-38000+20000] 6 51000 18000 0              [-18000+18000] 7 51000 89000

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