Courtney Corporation is considering two alternative investment proposals with the following data:
Proposal X Proposal Y
Investment $ 812,500 $ 390,000 Useful life 8 years 8 years Estimated annual net cash inflows for 8 years $ 125,000 $ 78,000 Residual value $ 40,000 $ 0 Depreciation method Straight-line Straight-line Required rate of return 14% 10%
How long is the payback period for Proposal Y? Group of answer choices
Cannot be determined with the information provided
20.31 years
9.75 years
5.00 years
6.50 years
The payback period is the time it takes for an investment to generate an amount of cash inflows equal to the initial investment. To calculate the payback period for Proposal Y, we use the following formula:
[ \text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Net Cash Inflows}} ]
For Proposal Y:
[ \text{Payback Period} = \frac{390,000}{78,000} = 5 \text{ years} ]
Therefore, the payback period for Proposal Y is 5.00 years. The correct answer is:
5.00 years