Question

Griffith Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows:

	Proposal X	Proposal Y	Proposal Z
Initial investment in equipment	$240,000	$150,000	$190,000
Working capital needed	0	0	10,000
Annual cash saved by operations:
Year 1	80,000	50,000	80,000
Year 2	80,000	42,000	80,000
Year 3	80,000	46,000	80,000
Year 4	80,000	24,000	80,000
Salvage value end of year:
Year 1	100,000	80,000	60,000
Year 2	80,000	60,000	50,000
Year 3	40,000	40,000	30,000
Year 4	10,000	20,000	15,000
Working capital returned	0	0	10,000

Determine each proposal's payback.

Answer 1

Each proposal's payback is calculated below:

1) Payback Period for proposal X is calculated below:

Payback Period = Initial Investment / Annual Cash Inflow

= $240,000/ $80,000

= 3 Years

Payback Period for proposal X is 3 Years

2) Payback Period for proposal Y is calculated below:

Payback Period = 3 Years + ($150,000 - ($50,000 + $42,000 + $46,000))/ $24,000

= 3 Years + 0.5 Years

= 3.5 Years

Payback Period for proposal Y is 3.5 Years

3) Payback Period for proposal Z is calculated below:

Payback Period = Initial Investment / Annual Cash Inflow

Initial Investment = $190,000 + $10,000

= $200,000

Payback Period = $200,000/ $80,000

= 2.5 Years

Payback Period for proposal Z is 2.5 Years