The director of capital budgeting for Big Sky Health System, Inc. has estimated the following cash...

The director of capital budgeting for Big Sky Health System, Inc. has estimated the following cash flows for a new service and has a cost of capital of 8%. What is the project’s payback period?

year annual cash flows project cost of capital

0 $ (125,000) 8%

1 $ 75,000

2 $ 55,000

3 $ 25,000

Choice: 4 years Choice: Not enough information to tell. Choice: 1.91 years Choice: 2.4 years

Expert Solution

Year	0	1	2	3
Cashflow(in $)	(125,000)	75,000	55,000	25,000
Cumulative Cashflow(in $)	(125,000)	(50,000)	5,000	30,000

Payback Period = A + (B/C)

where

A - last time period where the cumulative cash flow was negative = 1

B - absolute value of the CCF at the end of that period A = 50000

C - value of the CCF in the next period after A = 55000

Payback Period = 1+(50000/55000)

= 1.91 years

jeff jeffy answered 1 year ago

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