Homework SoursePrime Financial Inc is evaluating two capital investment pro
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:
Determine the cash payback period for both location proposals.
| Year 1 | $90,000 | Year 5 | $29,000 | |
| Year 2 | 68,000 | Year 6 | 22,000 | |
| Year 3 | 42,000 | Year 7 | 17,000 | |
| Year 4 | 38,000 | Year 8 | 14,000 |
Solution
CASH PAYBACK PERIOD
LOCATION 1
=$200,000/$40,000
= 5 YEARS
LOCATION 2
PAYBACK PERIOD = Years before full recovery +unrecovered cost at the start of the year/cash flow during the year
= 2+($200,000-$158,000)/$42,000
=2+1
= 3 YEARS
| YEAR | CASH INFLOW | CUMULATIVE CASHINFLOW |
| 1 | $90,000 | $90,000 |
| 2 | $68,000 | $158,000 |
| 3 | $42,000 | $200,000 |
| 4 | $38,000 | $238,000 |
| 5 | $29,000 | $267,000 |
| 6 | $22,000 | $289,000 |
| 7 | $17,000 | $306,000 |
| 8 | $14,000 | $320,000 |
