The cash payback period for each proposal is as follows:
Proposal M = 4.4 years
Proposal N = 3 years
The cash payback period describes the period when the initial cash outlay is recovered through the net cash flows that occur in subsequent years.
Proposal M Proposal N
Initial cash outlay $550,000 $550,000
Total cash flow $750,000 $750,000
Annual net cash flows $125,000
Net Cash Flows for Proposal N:
Year 1 $250,000
Year 2 200,000
Year 3 150,000
Year 4 75,000
Year 5 50,000
Year 6 25,000
Cash payback period for Proposal M = 4.4 years ($550,000 ÷ $125,000)
Cash payback period for Proposal N = 3 years ($550,000 - $250,000 - $200,000 - $100,000)
Thus, the cash payback period for Proposal M can be computed by dividing the initial outlay by the equal annual net cash flows, that of Proposal N will be determined by subtracting each year's net cash flows.
Question Completion:
Year 1 $250,000
Year 2 200,000
Year 3 150,000
Year 4 75,000
Year 5 50,000
Year 6 25,000
Determine the cash payback period for each proposal. Round your answers to three decimal places, if necessary.