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The director of capital budgeting for Big Sky Health System, Inc. has estimated the following cash...

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Finance

The director of capital budgeting for Big Sky Health System,Inc. has estimated the following cash flows for a new service andhas a cost of capital of 8%. What is the project’s paybackperiod?

year annual cash flows project cost of capital

0 $ (125,000) 8%

1 $ 75,000

2 $ 55,000

3 $ 25,000

Choice: 4 years Choice: Not enough information to tell. Choice:1.91 years Choice: 2.4 years

Answer & Explanation Solved by verified expert
3.5 Ratings (575 Votes)

Year 0 1 2 3
Cashflow(in $)          (125,000)              75,000                     55,000                 25,000
Cumulative Cashflow(in $)          (125,000)            (50,000)                       5,000                 30,000

Payback Period = A + (B/C)

where

A -  last time period where the cumulative cash flow was negative = 1

B - absolute value of the CCF at the end of that period A = 50000

C - value of the CCF in the next period after A = 55000

Payback Period = 1+(50000/55000)

= 1.91 years
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Transcribed Image Text

The director of capital budgeting for Big Sky Health System,Inc. has estimated the following cash flows for a new service andhas a cost of capital of 8%. What is the project’s paybackperiod?year annual cash flows project cost of capital0 $ (125,000) 8%1 $ 75,0002 $ 55,0003 $ 25,000Choice: 4 years Choice: Not enough information to tell. Choice:1.91 years Choice: 2.4 years

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