Question

5. The director of capital budgeting for Big Sky Health System, Inc. has estimated the following cash flows for a new service and has a cost of capital of 10%. What is the project's payback period? Annual Cash Project Cost of Year Flows Capital (125,000) 10% on to 75,000 55,000 3 $ 25,000 1200 og sva si notis Moonie odoo Sarol Choice: 4 years quod obro Choice: Not enough information to tell Choice: 1.91 years 2. od Choice: 2.4 years O ttons 22

Answer 1

The payback period is computed as shown below:

Payback period is the period in which we are able to recover the project's initial investment

The payback period will be as follows:

The $ 125,000 investment is recovered between year 1 and 2 since the cash flows of both year 1 and 2 are as follows:

= $ 75,000 + $ 55,000

= $ 130,000

The payback period will be:

= 1 year + Remaining amount to be recovered / 2nd year cash inflow

= 1 year + ($ 125,000 - $ 75,000) / $ 55,000

= 1.91 years Approximately

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