Chinook Industries Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $180,000 and each with an eight-year life and expected total net cash flows of $360,000. Location 1 is expected to provide equal annual net cash flows of $45,000, and Location 2 is expected to have the following unequal annual net cash flows: Year 1 $81,000 Year 2 61,000 Year 3 38,000 Year 4 58,000 Year 5 43,000 Year 6 32,000 Year 7 25,000 Year 8 22,000 Determine the cash payback period for both location proposals. Location 1 years Location 2 years
Payback period = initial investment / annual net cash inflow
Location 1:
Initial investment = 180000
Annual net cash inflow = 45000
Payback period = 180000/45000 = 4 years
Location 2:
Year |
Investment |
Cash flow |
Net cash flow |
0 |
180000 |
0 |
-180000 |
1 |
0 |
81000 |
-99000 |
2 |
0 |
61000 |
-38000 |
3 |
0 |
38000 |
0 |
4 |
0 |
58000 |
+58000 |
5 |
0 |
43000 |
+101000 |
6 |
0 |
32000 |
+133000 |
7 |
0 |
25000 |
+158000 |
8 |
22000 |
+180000 |
Payback period = 3 years
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