Question

Cash Payback Period

Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $476,000 and each with an eight-year life and expected total net cash flows of $544,000. Location 1 is expected to provide equal annual net cash flows of $68,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1	$171,000
Year 2	124,000
Year 3	81,000
Year 4	62,000
Year 5	38,000
Year 6	33,000
Year 7	22,000
Year 8	13,000

Determine the cash payback period for both location proposals.

Location 1	years
Location 2	years

Answer 1

Location 1

Cash payback period = Initial investment/Annual cash inflow

= 476,000/68,000

= 7 years

Location 2

Year	Cash inflow	Cumulative cash inflow
1	$171,000	$171,000
2	124,000	295,000
3	81,000	376,000
4	62,000	438,000
5	38,000	476,000
6	33,000	509,000
7	22,000	531,000
8	13,000	544,000

Cash payback period refers to the time in which initial investment in the project is recovered.

Cash payback period = 5 year

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