Cash Payback Period for a Service Company Chinook Industries Inc. is evaluating

Question

Cash Payback Period for a Service Company

Chinook Industries Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $175,000 and each with an eight-year life and expected total net cash flows of $280,000. Location 1 is expected to provide equal annual net cash flows of $35,000, 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 $68,000 Year 2 51,000 Year 3 33,000 Year 4 23,000 Year 5 37,000 Year 6 29,000 Year 7 21,000 Year 8 18,000

Explanation / Answer

Location 1 :

Cash payback period = 175000/35000 = 5 years

Location 2 :

so location 2 cash payback period is 4 years

Year Cash flow Cumulative cash flow 1 68000 68000 2 51000 119000 3 33000 152000 4 23000 175000 5 37000 212000 6 29000 241000 7 21000 262000 8 18000 280000

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