Question

Wyoming Woodworks is evaluating two capital investment proposals for a retail outlet store, each requiring an investment of $1,015,000 and each with a five-year life and expected total net cash flows of $1,268,750. Location 1 is expected to provide equal annual net cash flows of $253,750, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1	$406,000
Year 2	376,000
Year 3	233,000
Year 4	176,900
Year 5	76,850

Determine the cash payback period for both location proposals.

Location 1	years
Location 2	years

Answer 1

Location 1

Payback period=initial investment/annual cash flows

=(1,015,000/253750)=4 years

Location 2:

Year	Cash flows	Cumulative Cash flows
0	(1,015,000)	(1,015,000)
1	406,000	(609,000)
2	376,000	(233,000)
3	233,000	0
4	176900	176900
5	76850	253750

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

=3 years.