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

5 years

Explanation:

Given:

For proposal X

The initial Investment = $10,700,000

Useful life =  5 years

Estimated annual net cash inflows for 5 years = $2,140,000

Residual value = $50,000

since,

the depreciation method is a straight line

thus,

payback period for the proposal X will be given as:

Payback period = (Initial investment) / (Estimated annual cash inflows)

on substituting the values, we get

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

or

Payback period for the proposal X = 5 years

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