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 $23,010,000: it will enable the company to increase its annual cash inflow by $5,900,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $36,080,000; it will enable the company to increase annual cash flow by $8,200,000 per year. This plane has an eight-year useful life and a zero salvage value. Required Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)

Explanation / Answer

Payback period of each investment alternative is calculated as under:

Alternative 1 Year 0 Year 1-5 Cash Outflow ($230,10,000) Cash Inflow $59,00,000 Alternative 2 Year 0 Year 1-8 Cash Outflow ($360,80,000) Cash Inflow $82,00,000 Alternative 1 Payback period = Initial Investment/ Cash inflow per year $23010000/5900000 3.9 Alternative 2 Payback period = Initial Investment/ Cash inflow per year 36080000/8200000 4.4

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