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29 June, 19:59

Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows:

Year 1 $250,000

Year 2 200,000

Year 3 150,000

Year 4 75,000

Year 5 50,000

Year 6 25,000

$750,000

Determine the cash payback period for each proposal.

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  1. 29 June, 21:45
    0
    For M = 4.4 Years

    For N = 2.667 Years

    Explanation:

    For computing the cash payback period for each proposal we need to find first conventional payback period is shown below:-

    Year Expected Cash Flow Cumulative Cash Flow

    0 - $550,000 - $550,000

    1 $250,000 - $300,000

    (-$550,000 + $250,000)

    2 $200,000 - $100,000

    (-$300,000 + $200,000)

    3 $150,000 $50,000

    (-$100,000 + $150,000)

    4 $75,000 $125,000

    (50,000 + $75,000)

    5 $50,000 $175,000

    ($125,000 + $50,000)

    6 $25,000 $200,000

    ($175,000 + $25,000)

    Now,

    Cash payback period For M = Initial investment : Annual cash flows

    = $550,000 : $125,000

    = 4.4 Years

    Years Proportion = $100,000 : $150,000 + 2 years

    = 0.666667 + 2 years

    = 2.667 Years
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