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

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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