Question

Courtney Corporation is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment $ 812,500 $ 390,000 Useful life 8 years 8 years Estimated annual net cash inflows for 8 years $ 125,000 $ 78,000 Residual value $ 40,000 $ 0 Depreciation method Straight-line Straight-line Required rate of return 14% 10% How long is the payback period for Proposal Y?

Answer 1

5 years

Step-by-step explanation:

As per given data

Proposal X Proposal Y

Investment $812,500 $390,000

Useful life 8 years 8 years

Estimated annual net cash inflows $125,000 $78,000

Residual value $40,000 $0

Depreciation method Straight-line Straight-line

Required rate of return 14% 10%

Payback period is the time in which a project returns back the initial investment in the form of net cash flow.

Proposal Y

Initial Investment = $390,000

Annual net cash inflows = $78,000

Payback period = Initial Investment / Annual net cash inflows

Payback period = $390,000 / $78,000

Payback period = 5 years