Question

Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $390,000. The cash flow patterns for each project are given below.

Storage facility: Even cash flows of $190,000 per year

Car wash: $112,800, $143,300, $61,000, $125,000, and $99,000

Required:

1. Calculate the payback period for the storage facility (even cash flows). Round your answer to one decimal place.
years

2. Calculate the payback period for the car wash facility (uneven cash flows). Round your answer to three decimal places

Answer 1

Payback period is the time period in which the original investment is recovered

1.Payback period in case of even cash flows = Original investment/Annual cash flows

= 390,000/190,000

= 2.1 years

2.For uneven cash flows:

Year	Cash Flow	Cumulative cash flows
1	112,800	112,800
2	143,300	256,100
3	61,000	317,100
4	125,000	442,100
5	99,000	541,100

Payback period = 3 + (390,000-317,100)/125,000

= 3.5832

i.e. 3.583 ears