Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows:

Year 1 $250,000

Year 2 200,000

Year 3 150,000

Year 4 75,000

Year 5 50,000

Year 6 25,000

$750,000

Determine the cash payback period for each proposal.

For M = 4.4 Years

For N = 2.667 Years

Explanation:

For computing the cash payback period for each proposal we need to find first conventional payback period is shown below:-

Year Expected Cash Flow Cumulative Cash Flow

0 - $550,000 - $550,000

1 $250,000 - $300,000

(-$550,000 + $250,000)

2 $200,000 - $100,000

(-$300,000 + $200,000)

3 $150,000 $50,000

(-$100,000 + $150,000)

4 $75,000 $125,000

(50,000 + $75,000)

5 $50,000 $175,000

($125,000 + $50,000)

6 $25,000 $200,000

($175,000 + $25,000)

Now,

Cash payback period For M = Initial investment : Annual cash flows

= $550,000 : $125,000

= 4.4 Years

Years Proportion = $100,000 : $150,000 + 2 years

= 0.666667 + 2 years

= 2.667 Years