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 $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: Year 1 $79,000 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 $25,000 19,000 15,000 12,000 60,000 36,000 34,000 Determine the cash payback period for both location proposals. Location 1 Location 2 years years

Explanation / Answer

Location 1:

Cash payback period = (175000 / 280000) * 8 = 5 years

Location 2:

The cummulative cash flow for first three years = (79000 + 60000 + 36000) = 175000 = Initial investment

so Cash payback period = 3 years

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