Cash payback period for a Service Company Prime Financial Inc. is evaluating two

Question

Cash payback period for a Service Company

Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $140,000 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 $63,000 Year 5 $34,000 Year 2 48,000 Year 6 25,000 Year 3 29,000 Year 7 20,000 Year 4 45,000 Year 8 16,000

Explanation / Answer

Location 1:

Cash payback=Initial cost/Annualcash flows

(140000/35000)=4 years.

Location 2

This would gon on upto year 8.

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3 years.

Year Cash flow Cumulative Cash flow 0 (140000) (140000) 1 63000 (77000) 2 48000 (29000) 3 29000 0

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