Question

Proposals M and N each cost $600,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Year 1 Year 2 Year 3 Year 4 $250,000 $200,000 $150,000 S 75,000 $ 50,00 $ 25,00 Year 5 Year 6 Determine the cash payback period for each proposal. (15 points) Anet relalash law patsdh poiacl Cosh Flow GO0,000 350,000 200,000 IS0000

Answer 1

Payback period

Proposal M= 4.80 years

Proposal N= 3 Years

Working

Payback period (project M)
Initial Investment	/	Annual cash inflow	=	Payback period
$          600,000.00	/	$      125,000.00	=	4.80 Years

Project N
Year	Net Cash Flow	Cummulative Cash Flow
0	$ (6,00,000.00)	$ (6,00,000.00)
1	$   2,50,000.00	$ (3,50,000.00)
2	$   2,00,000.00	$ (1,50,000.00)
3	$   1,50,000.00	$                 -

Payback Period =  A+BC

In the above formula,

A is the last period with a negative cumulative cash flow;

B is the absolute value of cumulative cash flow at the end of the period A;

C is the total cash flow during the period after A

Payback Period =	3+	0
		0
Payback Period =		3 years