Question

Nubela Manufacturing is considering two alternative investment proposals with the following data:

Proposal X Proposal Y
Investment $10,700,000 $580,000
Useful life 5 years 5 years
Estimated annual
net cash inflows
for 5 years $2,140,000 $103,000
Residual value $50,000 $26,000
Depreciation method Straight-line Straight-line
Required rate of return 12% 13%
Calculate the payback period for Proposal X.
A) 9years B) 4 years C) 8 years D)5 years

Answer 1

5 years

Step-by-step explanation:

Given:

For proposal X

The initial Investment = $10,700,000

Useful life = 5 years

Estimated annual net cash inflows for 5 years = $2,140,000

Residual value = $50,000

since,

the depreciation method is a straight line

thus,

payback period for the proposal X will be given as:

Payback period = (Initial investment) / (Estimated annual cash inflows)

on substituting the values, we get

Payback period = $10,700,000 / $2,140,000

or

Payback period for the proposal X = 5 years