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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cash payback period for a service company

 Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $200,000 and each with an eight-year life and expected total net cash flows of $320,000. Location 1 is expected to provide equal annual net cash flows of $40,000, and Location 2 is expected to have the following unequal annual net cash flows:

 Determine the cash payback period for both location proposals.

Year 1 $60,000
Year 2 50,000
Year 3 50,000
Year 4 40,000
Year 5 $30,000
Year 6 30,000
Year 7 30,000
Year 8 30,000

To determine

Cash payback method:

Cash 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 long-term investment (fixed assets) of the business.

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

To determine: The cash payback period for location 1 and location 2 proposals.

Explanation

Initial Investment = $200,000

 Calculation of Cash Payback Period for Location 1:

CashPayBackPeriod=InitialCostAnnualCash

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