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Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $255,000 and each with an eight-year life and expected total net cash flows of $408,000. Location 1 is expected to provide equal annual net cash flows of $51,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1 - $82,000
Year 2 - 61,000
Year 3 - 41,000
Year 4 - 33,000
Year 5 - 20,000
Year 6 - 18,000
Year 7 - 89,000
Year 8 - 64,000
Determine the cash payback period for both location proposals
Location 1
years
Location 2
years

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Answer:

Location 1

Payback period

= Cash outflow/Cash inflow

= $255,000/$51,000

5 years

Location 2

Year    Cashflow   Cumulative cashflow

                $                       $

0         (255,000)          (255,000)

1            82,000             (173,000)

2            61,000             (112,000)

3             41,000             (71,000)

4             33,000            (38,000)

5             20,000            (18,000)

6             18,000                 0

7              89,000

8               64,000

Payback period = 6 years

Explanation:

In location 1, we will divide the initial outlay by the annual cash inflows in order to obtain the payback period since the cash inflows are constant

In location 2, we deduct the initial outlay from the cashflow for each year until the cash inflow is fully recovered.

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