Nubela Manufacturing is considering two alternative investment proposals with the following dа ta:

Proposal X Proposal Y

Investment $10,700,000 $580,000

Useful life 5 years 5 years

Estimated annual

net cash inflows

for 5 years $2,140,000 $103,000

Residual value $50,000 $26,000

Depreciation method Straight-line Straight-line

Required rate of return 12% 13%

Calculate the payback period for Proposal X.

A) 9years B) 4 years C) 8 years D) 5 years

5 years

Explanation:

Given:

For proposal X

The initial Investment = $10,700,000

Useful life = 5 years

Estimated annual net cash inflows for 5 years = $2,140,000

Residual value = $50,000

since,

the depreciation method is a straight line

thus,

payback period for the proposal X will be given as:

Payback period = (Initial investment) / (Estimated annual cash inflows)

on substituting the values, we get

Payback period = $10,700,000 / $2,140,000

or

Payback period for the proposal X = 5 years