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QUESTION 6

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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 $280,000 $280,000 Annual after-tax cash inflows 41,250 After-tax cash inflows at the end of years 3, 6, 9, and 12 95,000 Life of project 12 years 12 years CLICK HERE TO REVIEW LEARNING OBJECTIVES QUESTION 6 Not complete Points out of 3.00 P Flag question Net Present Value Analysis Hermson Company must evaluate two capital expenditure proposals. Hemson's cutoff rate is 12%. Data for the two proposals follow. Proposal X ProposalY Required investment Annual after-tax cash inflows After-tax cash inflows at the end of years 3, 6, 9, and 12 Life of project $280,000 $280,000 41,250 95,000 12 years 12 years 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 years Proposal Y years Check

Explanation / Answer

Calculate payback period :

Proposal X = 280000/41250 = 6.8 years

Proposal Y = 9 years

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