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 $400,000. The cash flow patterns for each project are given below.

Storage facility: Even cash flows of $200,000 per year

Car wash: $112,900, $143,400, $68,000, $126,000, and $92,000

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.
years

Answer 1

Calculation of Payback Period

1.Storage Facility

Payback Period = Initial Investment/Nat Cash Inflows

=$400000/200000

=2 Years

2.Car Wash Facility

Year Total Cash Flow ($) Cumulative Flow($)

0   (400000) (400000)

1 112900 (287100)

2 143400 (143700)

3 68000 (75700)

4 126000 50300

5 92000 142300

the year with the last negative outflow has to be selected. So, in this case, it will be year three.

Divide the total cumulative flow in the year in which the cash flows became positive by the total flow of the consecutive year.

75700/126000=0.60

Total Payback Period is =3.60Years