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 $125,000 and each with an eight-year life and expected total net cash flows of $200,000. Location 1 is expected to provide equal annual net cash flows of $25,000, and Location 2 is expected to have the following unequal annual net cash flows:

Determine the cash payback period for both location proposals.

1-8 years are the answer options are the options given.

Year 1 $49,000 Year 5 $26,000 Year 2 36,000 Year 6 21,000 Year 3 24,000 Year 7 15,000 Year 4 16,000 Year 8 13,000

Explanation / Answer

Calculate cash payback period :

Location 1 = initial investment/annual cash flow = 125000/25000 = 5 years

Location 2 :

so Location 2 Payback period is 4 years

Year Cash flow Cumlative cash flow 1 49000 49000 2 36000 85000 3 24000 109000 4 16000 125000 5 26000 151000 6 21000 172000 7 15000 187000 8 13000 200000

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