Primera Banco is evaluating two capital investment proposals for a drive-up ATM

Question

Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $413,000 and each with an eight-year life and expected total net cash flows of $472,000. Location 1 is expected to provide equal annual net cash flows of $59,000, and Location 2 is expected to have the following unequal annual net cash flows: Year 1 $132,000 Year 2 99,000 Year 3 66,000 Year 4 54,000 Year 5 33,000 Year 6 29,000 Year 7 34,000 Year 8 25,000 Determine the cash payback period for both location proposals.

Explanation / Answer

Solution: Location 1 has inflow of $59,000 each year for 8 years

Payback period = 472000/8 =7 years

Location 2 has the following inflows

Year

Inflow

Cumulative total

1

132000

132000

2

99000

231000

3

66000

297000

4

54000

351000

5

33000

384000

6

29000

413000

7

34000

447000

8

25000

472000

Thus location 2 has a payback period of 6 years.

Year

Inflow

Cumulative total

1

132000

132000

2

99000

231000

3

66000

297000

4

54000

351000

5

33000

384000

6

29000

413000

7

34000

447000

8

25000

472000

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