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Payback Period

Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $380,000. The cash flow patterns for each project are given below.

Storage facility: Even cash flows of $190,000 per year

Car wash: $113,000, $143,400, $63,000, $129,000, and $93,000

Required:

1. Calculate the payback period for the storage facility (even cash flows). Round your answer to one decimal place.

1 years

2. Calculate the payback period for the car wash facility (uneven cash flows). Round your answer to three decimal places.

2 years

Which project should be accepted based on payback analysis? Storage facility

3. What if a third mutually exclusive project, a laundry facility, became available with the same investment and annual cash flows of $220,000? It has a shorter payback period and provides more cash flow over its life.

Now which project would be chosen? Laundry facility

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1.,2. & 3. The payback period is the time required for a firm to recover its original investment.

See Example 19.1

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