Nubela Manufacturing is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment $10,700,000 $580,000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years $2,140,000 $103,000 Residual value $50,000 $26,000 Depreciation method Straightminusline Straightminusline Required rate of return 12% 13% Calculate the payback period for Proposal X.

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Kolawole845 Kolawole845 · Answer 1 · 2020-05-18T03:55:25+02:00

Answer:

Payback period = 4 years 11.72 months

Explanation:

The payback period is the estimated length of time in years it takes

the net cash inflow from a project to equate and recoup the the initial cost

Where a project is expected to generate a series of equal annual net cash inflow, the payback period can be calculated as:

Payback period =The initial invest /Net cash inflow per year

Payback period for project X

Cumulative net cash inflow for 4 years

=$2,140,000× 4 = $8,560,000

Cash in flow in year 5 = annual cash inflow + scrap value

2,140,000 + 50,000= $2,190,000

Payback period = 4 years + (10,700,000-8,560,000 )/2,190,000 × 12 months

= 4 years 11.72 months

Payback period for project X= 4 years 11.72 months