Cash PaybackAnderson Company must evaluate two capital expenditure proposals. Anderson's hurdle rate is 12%. Data for the two proposals follow. Proposal XProposal YRequired investment$540,000$540,000Annual after-tax cash inflows54,000 After-tax cash inflows at the end of years 3, 6, 9, and 12 136,000Life of project12 years12 yearsWhat is the cash payback period for Proposal X? For Proposal Y?Hint: For Proposal Y, in what year (3, 6, 9 or 12) will the full original investment be recovered?Round Proposal X answer to one decimal place, if applicable.Proposal XAnswer years Proposal YAnswer years

Payback period refers to the time period that is required to recover the initial cost. With the help of the payback period, the management can get the break-even time also. We can get payback period by dividing initial investment with annual cash flow.Pay back period =Year before full recovery+Unrecovered cost at start of the yearCash flow during the year Proposal X = 10 + ( 0 / 54,000 ) = 10 Years Proposal Y = 11 + ( 132000/ 136000 ) = 11 + 0.97 = 11.97 years

Answered: Cash Payback Anderson Company must…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Cash Payback
Anderson Company must evaluate two capital expenditure proposals. Anderson's hurdle rate is 12%. Data for the two proposals follow.

	Proposal X	Proposal Y
Required investment	$540,000	$540,000
Annual after-tax cash inflows	54,000
After-tax cash inflows at the end of years 3, 6, 9, and 12		136,000
Life of project	12 years	12 years

What is the cash payback period for Proposal X? For Proposal Y?

Hint: For Proposal Y, in what year (3, 6, 9 or 12) will the full original investment be recovered?

Round Proposal X answer to one decimal place, if applicable.

Proposal X

Answer

years

Proposal Y

Answer

years

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