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. A) 9years B) 4 years C) 8 years D)5 years
Answered on
The payback period is the time it takes for an investment to generate enough cash flow to recover its initial cost. It's calculated by accumulating the net cash inflows until they equal the initial investment.
For Proposal X:
Initial Investment = $10,700,000
Annual Net Cash Inflows = $2,140,000
The payback period is calculated as follows:
Year 1: $2,140,000
Year 2: $2,140,000 + $2,140,000 = $4,280,000
Year 3: $4,280,000 + $2,140,000 = $6,420,000
Year 4: $6,420,000 + $2,140,000 = $8,560,000
Year 5: $8,560,000 + $2,140,000 = $10,700,000 (Initial Investment Recovered)
Therefore, the payback period for Proposal X is 5 years (Option D) as it takes 5 years for the cumulative cash inflows to equal the initial investment of $10,700,000.