Prime Financial Inc. is evaluating two capital investment proposals for a drive-

Question

Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $150,000 and each with an eight-year life and expected total net cash flows of $240,000. Location 1 is expected to provide equal annual net cash flows of $30,000, and Location 2 is expected to have the following unequal annual net cash flows:

Determine the cash payback period for both location proposals.

Year 1 $59,000 Year 5 $31,000 Year 2 44,000 Year 6 25,000 Year 3 29,000 Year 7 18,000 Year 4 18,000 Year 8 16,000

Explanation / Answer

Location 1:

Payback=Initial investment/annual cash flows

=(150000/30000)=5 years.

Location 2:

This table would continue upto year 8.

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4 years.

Year Cash flows Cumulative Cash flows 0 (150000) (150000) 1 59000 (91000) 2 44000 (47000) 3 29000 (18000) 4 18000 0

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