Question

XYZ is considering two proposed machinery investments. Proposals A and B each cost $600,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal A is expected to provide equal annual net cash flows of $125,000 while the net cash flows for Proposal B are as follows: 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 Proposal A and B. Show all calculations. Rounds answers to 1 decimal place.

Answer 1

Payback period for Proposal A = 4.8 years

Payback period for Proposal B = 3 years

Step-by-step explanation:

Calculation of Payback period for Proposal A:

Year Investment Net Annual Cash Flow

0 $600,000 $125,000

1 $125,000

2 $125,000

3 $125,000

4 $125,000

5 $125,000

6 $125,000

Cash Payback period = Cost of Capital investment/Net Annual cash flow

Cash Payback period = $600,000/$125,000

Cash Payback period = 4.8 years

Calculation of Payback period for Proposal B:

Year Investment Net Annual Cash Flow Cumulative Net Cash Flows

0 $600,000 $250,000 $250,000

1 $200,000 $450,000

2 $150,000 $600,000

3 $75,000 $675,000

4 $50,000 $725,000

5 $25,000 $750,000

6

The Cumulative net cash flow of $600,000 is equal to investment cost of $600,000 for 3 years. So, payback period for proposal B is 3 years.