   Chapter 15, Problem 15.5E

Chapter
Section
Textbook Problem

Cash payback periodWyoming ‘xx1works is evaluating two capital investment proposals for a retail outletstore, each requiring an investment of \$1,000,000 and each with a five-year life and expected total net cash flows of \$1,250,000. Location 1 is expected to provide equal annualnet cash flows of \$250,000, and Location 2 ¡s expected to have the following unequal an Determine the cash payback period for both location proposals.

To determine

Concept Introduction:

Capital budgeting is a technique to plan long term investment of funds in long term activities whose benefit released for several years.

Example: - Purchase of machineries, purchase of building for business purpose, setting of factories etc.

Cash payback period refers to the period in which entire cost of project introduced is expected to realize by way of cash inflows.

To calculate cash payback period for both location proposals.

Explanation

Calculation of Payback Period

1. In case of equal cash inflows
2. Payback Period = Total Cash Outflow /Annual Cash Inflow
3. In case of unequal Cash Inflows
4. Payback Period = Years up to cumulative Cash inflow is less than total Cash Outflow + (Total cash Outflow-Cumulative cash Inflow of the year in which cumulative cash flows is less than total cash flow)/Cash flows immediately succeeding the year in which cumulative cash flows is less than total cash flow

In the present case

For Location 1

Given,

Present value of Outflow = \$ 1,000,000

Present value of equal cash Inflows = \$ 250,000

Payback Period =\$ 1,000,000 / \$ 250,000

= 4 year

In the above case payback period is 4 years as total cash outflow is recovered at the end of 4th year.

For Location 2

Given,

Present value of Outflow = \$ 1,000,000

Present value of unequal cash Inflows as follows

 Years 1 2 3 4 5

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