Cash Payback Period Primera Banco is evaluating two capital investment proposals
ID: 2579282 • Letter: C
Question
Cash Payback Period
Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $164,000 and each with an eight-year life and expected total net cash flows of $328,000. Location 1 is expected to provide equal annual net cash flows of $41,000, and Location 2 is expected to have the following unequal annual net cash flows:
20,000
Determine the cash payback period for both location proposals.
Year 1 $74,000 Year 2 56,000 Year 3 34,000 Year 4 52,000 Year 5 39,000 Year 6 30,000 Year 7 23,000 Year 820,000
Determine the cash payback period for both location proposals.
Location 1 Select 1 2 3 4 5 6 7 8 years Location 2 Select 1 2 3 4 5 6 7 8 yearsExplanation / Answer
Payback period is the time it takes for a project to return the initial capital, Payback period is different than discounted payback in which cash flows are discounted first with required rate of return/discount rate, in payback period method cash flows are not discounted.
Cash payback period = Total initial investment/annual return
Location 1 has equal return so calculating payback is easy for it
Cash payback period = 164000/41000 = 4 years
Location 2 has unequal cash inflow so calculating cash payback is tricky, pls refer below
Year
Cash Inflow
Cumulative cash flow
1
74000
74000
2
56000
130000
3
34000
164000
4
52000
216000
5
39000
255000
6
30000
285000
7
23000
308000
8
20000
328000
At the end of year 3 initial investment of 164000 will be recovered.
So payback of location 2 is 3 years.
It is advisable to select location 2 because it has shorter payback period.
Hope that helps, pls comment if u have any further query.
Year
Cash Inflow
Cumulative cash flow
1
74000
74000
2
56000
130000
3
34000
164000
4
52000
216000
5
39000
255000
6
30000
285000
7
23000
308000
8
20000
328000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.