Question

Cash Payback Period

Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $280,000 and each with an eight-year life and expected total net cash flows of $560,000. Location 1 is expected to provide equal annual net cash flows of $70,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1	$109,000
Year 2	81,000
Year 3	53,000
Year 4	37,000
Year 5	98,000
Year 6	78,000
Year 7	56,000
Year 8	48,000

Determine the cash payback period for both location proposals.

Location 1 _____	years
Location 2 ______	years

Answer 1

Cash payback for Location 1=initial investment/annual cash flows

=(280,000/70000)=4 years

For Location 2:

Year	Cash flows	Cumulative Cash flows
0	(280,000)	(280,000)
1	109000	(171000)
2	81000	(90000)
3	53000	(37000)
4	37000	0
5	98000	98000
6	78000	176000
7	56000	232000
8	48000	280,000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4 years