In: Accounting
Net Present Value Analysis
Hermson Company must evaluate two capital expenditure proposals.
Hermson's cutoff rate is 12%. Data for the two proposals
follow.
Proposal X | Proposal Y | |
---|---|---|
Required investment | $280,000 | $280,000 |
Annual after-tax cash inflows | 41,250 | |
After-tax cash inflows at the end of years 3, 6, 9, and 12 | 95,000 | |
Life of project | 12 years | 12 years |
What is the cash payback period for Proposal X? For Proposal Y?
Hint: For Proposal Y, in what year (3, 6, 9 or 12) will the full original investment be recovered?
Round Proposal X answer to one decimal place, if applicable.
Proposal X
Answer
years
Proposal Y
Answer
years
Ans. Calculationof payback period of X = 41250+41250+41250+41250+41250+41250+32500/41250
= 6 .79 years
Payback period for Proposal Y =
end of 3rd year = 95000
end of 6th year = 95000
Balance end of 9th yr = 90000 (280000-95000-95000)
during the period of 7 to 9 for the 3yrrs cash flow is 95000, monthly cashflow is (95000/3) = 31667
cumulative cash flow for 7th and 8th year (31667X2) = 63333, Balance amt to cover investment cost is (90000-63333) = 26667,
Payback period is = 6+2+ 26667/31667 = 8.84 years