Question

Nubela Manufacturing is considering two alternative investment proposals with the following​ data: Proposal X Proposal Y Investment ​$10,700,000 ​$580,000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years ​$2,140,000 ​$103,000 Residual value ​$50,000 ​$26,000 Depreciation method ​Straight-line ​Straight-line Required rate of return ​12% ​13% Calculate the payback period for Proposal X.

Answer 1

5 years

Step-by-step explanation:

Payback period is the time in which a project returns back the initial investment in the form of net cash flow.

As per given data

Proposal X Proposal Y

Investment ​ $10,700,000 ​ $580,000

Useful life 5 years 5 years

Net cash inflows 5 years ​$2,140,000 ​$103,000

Residual value ​$50,000 ​$26,000

Required rate of return ​ 12% ​13%

Depreciation method ​Straight-line ​Straight-line

Net cash inflow had already made all the cash flow adjustments.

As we have a constant cash inflows we can we following formula

Payback period = Initial Investment / Net cash flow

Payback period = $10,700,000 / $2,140,000 = 5 years