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Adams Airline Company is considering expanding its territory. The company has the opportunity to purchase one...

Adams Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $14,790,000; it will enable the company to increase its annual cash inflow by $5,100,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $34,400,000; it will enable the company to increase annual cash flow by $8,600,000 per year. This plane has an eight-year useful life and a zero salvage value. Required Determine the payback period for each investment alternative and identify the alternative Adams should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.)

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Expert Solution

1 Payback period
Location 1st Plane 2nd Plane
Net inflows/outflows Cumulativa cash inflows Net inflows/outflows Cumulativa cash inflows
year0     -1,47,90,000           -3,44,00,000
year 1          51,00,000       51,00,000                 86,00,000               86,00,000
year 2          51,00,000 1,02,00,000                 86,00,000           1,72,00,000
year 3          51,00,000 1,53,00,000                 86,00,000           2,58,00,000
year 4          51,00,000 2,04,00,000                 86,00,000           3,44,00,000
year 5          51,00,000 2,55,00,000                 86,00,000           4,30,00,000
year 6                 86,00,000           5,16,00,000
year 7                 86,00,000           6,02,00,000
year 8                 86,00,000           6,88,00,000
a 1st plane payback period
In the 3rd year airline company received its intial investment of USD 14790000
There for exact cash payback period would be between year 2 and year 3
Payback period           = 2 years +                 (initial outlfows -year 2 cumulative inflow/year 3 inflows
= 2 years+     (14790000-10200000)/5100000 years
= 2 years+   (4590000/5100000) years
2years +0.90 years
Payback period           = 2.90 years
2nd plane payback period
In the 4th year airline company received its intial investment of USD 34400000
Payback period           = 4 years
Since the payback period of alternative 1 is airplan is shorter, alternative 1 should be accepted based on the payback mehod

ekkarill92 answered 5 days ago
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