18. Proposals M and N each cost $600,000, have 6-year lives, and have expected t

Question

18.       Proposals M and N each cost $600,000, 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

Determine the cash payback period for each proposal & show caluculations.

  

Year 1

     

$250,000

     

Year 2

     

$200,000

     

Year 3

     

$150,000

     

Year 4

     

$ 75,000

     

Year 5

     

$ 50,000

     

Year 6

     

$ 25,000

  

Explanation / Answer

cash payback period for M = Initial Investment / Net Annual Cash = 600000 / 125000 = 4.8 years

cash payback period for N = (250000 + 200000+150000) = 600000

Total Cash recovered in 3 years Hence, Pay Back Period = 3 years

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