BAP Corporation is reviewing an investment proposal. The initial cost and estima

Question

BAP Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its book value. There would be no salvage value at the end of the investment's life. BAP Corporation uses a 12% target rate of return for new investment proposals. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the cash payback period for this proposal?

Explanation / Answer

As per question, we have to determine "THE CASH PAYBACK PERIOD" for the proposal, there is no need for discounting the future cash flows.

Intial Investment = $104,180

Cummulative Cash Flows:

Year 1 $44,500 $44,500

Year 2 $39,500 $84,000

Year 3 $35,300 $119,300

So, Cash Payback Period for the proposal= [ 2 + ($104,180 - $84,000) / 35,300 ] years

= 2.58 years

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