Cash payback period for a Service CompanyPrime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $225,000 and each with an eight-year life and expected total net cash flows of $360,000. Location 1 is expected to provide equal annual net cash flows of $45,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1 $101,000 Year 5 $32,000
Year 2 77,000 Year 6 24,000
Year 3 47,000 Year 7 19,000
Year 4 43,000 Year 8 17,000

Determine the cash payback period for both location proposals.

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ewomazinoade ewomazinoade · Answer 1 · 2020-05-05T05:40:21+02:00

Answer:

Location 1 : 5 years

Location 2 : 3 years

Explanation:

Cash payback period measures how long it takes for the amount invested in a project to be recovered from the cumulative cash flow.

For location 1,

The Payback period = amount invested/ cash inflow = $225,000 / $45,000 = 5 years

For location 2,

Of the $-225,000 invested, $101,000 is recovered. This would leave $-225,000 + $101,000 = $-124,000

In year 2, 77,000 is recovered. This would leave $-124,000 + 77,000 = $-47,000

In year 3, 47,000 is recovered. This would leave $-47,000 + 47,000 = 0

The Payback period is 3 years

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