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Net Present Value Analysis Hermson Company must evaluate two capital expenditure proposals. Hermson's cutoff rate is...

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

Solutions

Expert Solution

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


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