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Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $360,000. The cash flow patterns for each project are given below. Storage facility: Even cash flows of $120,000 per year Car wash: $112,500, $142,500, $60,000, $120,000, and $90,000 Required: 1. Calculate the payback period for the storage facility (even cash flows). 2. Calculate the payback period for the car wash facility (uneven cash flows). Which project should be accepted based on payback analysis? Explain. 3. What if a third mutually exclusive project, a laundry facility, became available with the same investment and annual cash flows of $150,000? Now which project would be chosen?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 19, Problem 1CE
Textbook Problem
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Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $360,000. The cash flow patterns for each project are given below.

Storage facility: Even cash flows of $120,000 per year

Car wash: $112,500, $142,500, $60,000, $120,000, and $90,000

Required:

  1. 1. Calculate the payback period for the storage facility (even cash flows).
  2. 2. Calculate the payback period for the car wash facility (uneven cash flows). Which project should be accepted based on payback analysis? Explain.
  3. 3. What if a third mutually exclusive project, a laundry facility, became available with the same investment and annual cash flows of $150,000? Now which project would be chosen?

1.

To determine

Compute the payback period for the storage facility.

Explanation of Solution

Payback period: Payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the proposal of long-term investment (fixed assets) of the business. But payback method has high risk than other method, because it does not follow the time value of money concept in valuing the cash inflows.

When the estimated annual net cash is equal (even cash flow), the cash payback period is calculated as below:

Payback

2.

To determine

Compute the payback period for the cash wash facility and identify the project which should be acceptable based on the payback period.

3.

To determine

Identify the project which would be chosen if laundry facility has annual cash flow of $150,000.

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Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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