Question

Help Exercise 16-12 Determining the payback period LO 16-4 Adams Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $16,830,000; it will enable the company to increase its annual cash inflow by $5,100,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $34,960,000; it will enable the company to increase annual cash flow by $9,200,000 per year. This plane has an eight-year useful life and a zero salvage value. Required a. Determine the payback period for each investment alternative and identify the alternative Adams should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.) Payback Period Payback Perlod a-1. Alternative 1 (First plane) Alternative 2 (Second plane) a-2. Adams should accept years

Answer 1

for a) computation of payback period each , alternative payback period - Initical investment Annualnet cash in frows back period first plane) 3.3 years al Alternative Alternative 2 (Second plane) 3.8 years 19-2 Adams should accept Alternative working notes a for alternative - 1 = 3.3 years payback period = $16830000 $ 5100 000 for alternative - 2 - payback period = $34960.000 $ 920oooo = 308 years