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 $256,000 and each with an eight-year life and expected total net cash flows of $512,000. Location 1 is expected to provide equal annual net cash flows of $64,000, and Location 2 is expected to have the following unequal annual net cash flows:
Year 1   $115,000
Year 2   87,000
Year 3   54,000
Year 4   82,000
Year 5   61,000
Year 6   46,000
Year 7   36,000
Year 8   31,000
Determine the cash payback period for both location proposals.
Location 1   years
Location 2   years

Explanation / Answer

Payback period for location 1 (CAsh flow is even)

Payback period = Initial Investment/Cash Inflow per period

Payback period = 256000/64000 = 4 years

Location 2 (CAsh inflow uneven)

Payback period for location 2 = 3 years + 5000/82000=3years +0.06

Payback period = 3.06 years

Year Cash Flow Cummulative cash flow 0 (256000) 1 115000 (146000) 2 87000 (59000) 3 54000 (5000) 4 82000 77000

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