Nations Trust is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $380,000

Nations Trust is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $380,000 and each with an eight-year life and expected total net cash flows of $608,000. Location 1 is expected to provide equal annual net cash flows of $76,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1 $120,000 Year 5 $57,000
Year 2   90,000 Year 6  57,000
Year 3   90,000 Year 7  57,000
Year 4   80,000 Year 8  57,000

Determine the cash payback period for both location proposals.


Answer:

Location 1:  $380,000 ÷ $76,000 = 5-year cash payback period. 
Location 2:  4-year cash payback period, as indicated below. 

Cumulative 
Net Cash Net Cash 
Flow Flows 
Year 1…………………………………………………………………………  $120,000 $120,000 
Year 2……………………………………………………………………… 90,000 210,000 
Year 3………………………………………………………………………… 90,000 300,000 
Year 4……………………………………………………………………… 80,000 380,000