Question

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

Answer 1

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