Cash Payback Period Primera Banco is evaluating two capital investment proposals
ID: 2586107 • 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 $308,000 and each with an eight-year life and expected total net cash flows of $352,000. Location 1 is expected to provide equal annual net cash flows of $44,000, and Location 2 is expected to have the following unequal annual net cash flows:
Year 1 $120,000
Year 2 :89,000
Year 3 :59,000
Year 4 :40,000
Year 5 :15,000
Year 6 :12,000
Year 7 :9,000
Year 8 :8,000
Determine the cash payback period for both location proposals
Location 1 _____years Location 2 _____ yearsExplanation / Answer
Solution
Calculation of cash payback period for both location proposals
Location 1
Investment= $ 308,000 Life=8 years
Location 1 is expected to provide equal annual net cash flows of $ 44,000.
Cash payback period= Investment / Equal annual net cash flows
= $ 308,000 / $ 44,000
= 7 years (Answer)
Location 2
Investment= $ 308,000 Life=8 years
Location 2 is expected to provide unequal annual net cash flows.
Cash payback period= Year corresponding to cumulative annual net cash flows (which is equal to investment)
= 4 years (Answer)
Year
Annual net cash flows (in $)
Cumulative annual net cash flows (in $)
1
120,000
120,000
2
89,000
209,000
3
59,000
268,000
4
40,000
308,000 (Equals to Investment)
5
15,000
323,000
6
12,000
335,000
7
9,000
344,000
8
8,000
352,000
Answer: Cash payback period for both location proposals
Location 1
7 years
Location 2
4 years
Year
Annual net cash flows (in $)
Cumulative annual net cash flows (in $)
1
120,000
120,000
2
89,000
209,000
3
59,000
268,000
4
40,000
308,000 (Equals to Investment)
5
15,000
323,000
6
12,000
335,000
7
9,000
344,000
8
8,000
352,000
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