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1 May, 10:15

Cash Payback Period for a Service Company Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $200,000 and each with an eight-year life and expected total net cash flows of $320,000. Location 1 is expected to provide equal annual net cash flows of $40,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1 $60,000 Year 5 $30,000

Year 2 50,000 Year 6 30,000

Year 3 50,000 Year 7 30,000

Year 4 40,000 Year 8 30,000

Determine the Cash Paybck period for both location proposals.

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  1. 1 May, 12:11
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    Location 1 = 5 years

    Location 2 = 4 years

    Explanation:

    The period in which initial investment is recovered by a business is known as payapack period.

    Location 1

    Net cash flow = $320,000

    Cash Flow per year = $320,000 / 8 = $40,000

    Payback period = Initial Investment / Yearly cash flow = $200,000 / $40,000 per year = 5 years

    Location 2

    As per given Data

    Cash Flows

    Year1 $60,000 Year2 $50,000

    Year3 $50,000 Year4 $40,000

    Year5 $30,000 Year6 $30,000

    Year7 $30,000 Year8 $30,000

    Payback period Balance

    Year0 ($200,000) ($200,000)

    Year1 $60,000 ($140,000)

    Year2 $50,000 ($90,000)

    Year3 $50,000 ($40,000)

    Year4 $40,000 ($0)

    It took 4 year to recoveer the initial investment, so the payaback period is 4 years.
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