Primera Banco is evaluating two capital investment proposals for a drive-up ATM

Question

Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $252,000 and each with an eight-year life and expected total net cash flows of $504,000. Location 1 is expected to provide equal annual net cash flows of $63,000, and Location 2 is expected to have the following unequal annual net cash flows:
Year 1 $98,000
Year 2 73,000
Year 3 48,000
Year 4 33,000
Year 5 88,000
Year 6 71,000
Year 7 50,000
Year 8 43,000
Determine the cash payback period for both location proposals. includes Location 1  and
Location 2.

Explanation / Answer

Location 1 Cash payback period = Initial investment/Net annual cashflows = $252000/$63000 = 4 years Location 2 Year Cashflow Cumulative cashflow 0 -252000 -252000 1 98000 -154000 2 73000 -81000 3 48000 -33000 4 33000 0 5 88000 88000 6 71000 159000 7 50000 209000 8 43000 252000 You may see that the cumulative cashflows are turning exactly positive by year 4 So, cash payback period for Location 2 is also 4 years

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