Net Present Value Analysis Hermson Company must evaluate two capital expenditure

Question

Net Present Value Analysis
Hermson Company must evaluate two capital expenditure proposals. Hermson’s cutoff rate is 12%. Data for the two proposals follow.

What is the cash payback period for Proposal X? For Proposal Y?

Hint: For Proposal Y, in what year (3, 6, 9 or 12) will the full original investment be recovered?

Round Proposal X answer to one decimal place, if applicable.

Proposal X

Answer

years

Proposal Y

Answer

years

Proposal X Proposal Y Required investment $140,000 $140,000 Annual after-tax cash inflows 33,000 After-tax cash inflows at the end of years 3, 6, 9, and 12 99,000 Life of project 12 years 12 years

Explanation / Answer

Calculate cash payback period :

Proposal X = 140000/33000 = 4.2 years

Proposal Y = 6 years

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