Bailey Airline Company is considering expanding its territory. The company has t

Question

Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $16,500,000; it will enable the company to increase its annual cash inflow by $6,600,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $33,660,000; it will enable the company to increase annual cash flow by $9,900,000 per year. This plane has an eight-year useful life and a zero salvage value.

Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)

Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $16,500,000; it will enable the company to increase its annual cash inflow by $6,600,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $33,660,000; it will enable the company to increase annual cash flow by $9,900,000 per year. This plane has an eight-year useful life and a zero salvage value.

Explanation / Answer

Cash cost of investment/annual cash flow= payback period

Alternative 1

$16,500,000/ $6,600,000=2.5 years

Alternative 2

$33,660,000/ $9,900,000=3.4 years

Since the payback period for the first airplane is shorter. Alternative 1 should be accepted based on the payback method

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