Nubela Manufacturing is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment $10,700,000 $580,000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years $2,140,000 $103,000 Residual value $50,000 $26,000 Depreciation method Straight-line Straight-line Required rate of return 12% 13% Calculate the payback period for Proposal X.

5 years

Explanation:

Payback period is the time in which a project returns back the initial investment in the form of net cash flow.

As per given data

                                           Proposal X       Proposal Y

Investment                        $10,700,000   $580,000

Useful life                           5 years             5 years

Net cash inflows 5 years  $2,140,000       $103,000

Residual value                   $50,000           $26,000

Required rate of return    12%                    13%

Depreciation method Straight-line Straight-line

Net cash inflow had already made all the cash flow adjustments.

As we have a constant cash inflows we can we following formula

Payback period = Initial Investment / Net cash flow

Payback period = $10,700,000 / $2,140,000 = 5 years

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