Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | }
\hline & \text { Proposal } X & \text { Proposal Y } \
\hline \text { Investment } & \$ 10,700,000 & \$ 580,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,140,000 & \$ 103,000 \
\hline \text { Residual value } & \$ 50,000 & \$ 26,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% & 13 \% \
\hline
\end{array}$$ Calculate the payback period for Proposal X.

Question

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | } 
\hline & \text { Proposal } X & \text { Proposal Y } \
\hline \text { Investment } & \$ 10,700,000 & \$ 580,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,140,000 & \$ 103,000 \
\hline \text { Residual value } & \$ 50,000 & \$ 26,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% & 13 \% \
\hline
\end{array}$$ Calculate the payback period for Proposal X.

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. For Proposal X, the payback period is calculated as follows:Payback period = Initial investment / Annual net cash inflows= $10,700,000 / $2,140,000= 5 years

Newman Automobiles Manufacturing Is Considering Two Alternative Investment Proposals with the Following