Question

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.

Answer 1

Answer:

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