Proposals A and B each cost $600,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows:

Year 1 $150,000

Year 2 140,000

Year 3 110,000

Year 4 150,000

Year 5 50,000

$600,000

Determine the cash payback period for each proposal. Round your answers to two decimal places, if necessary.

1. Payback period for proposal A = 3.77 years (Approx)

2. Payback period for proposal B = 5 years.

Explanation:

Payback period = Initial investment / Net annual cash inflow

Payback period for proposal A = Initial investment / Net annual cash inflow

Payback period for proposal A = $600000 / $159000

Payback period for proposal A = 3.7735 years

Payback period for proposal A = 3.77 years (Approx)

Payback period for Proposal B:

Computation of cumulative cash flow.

Year Cash flow Cumulative cash flow

1 $1,50,000 $1,50,000

2 $1,40,000 $2,90,000

3 $1,10,000 $4,00,000

4 $1,50,000 $5,50,000

5 $50,000 $6,00,000

$600,000 is recovered in 5th year,

So,

Payback period for proposal B = 5 years.