Info

1,928

25,000

5,723

Payback Period 5 years

Present-Value Payback Period 8.28 years (= 8 + $658/$2,333)

C. Based on the information provided in part B, it is clear that the cumulative cash flow in nominal dollars reached $0 at the end of year 5. This means that the nominal payback period is 5 years. The cumulative cash flow in present-value dollars exceeds $0 when the year 8 interest payment is received. This means that the present-value payback period is roughly 8 years. If cash flows were received on a continuous basis, the present-value payback period would be 8.28 years (= $658/$2,333).

D. Assuming a positive rate of interest, the present-value payback period is always longer than the nominal payback period. This stems from the fact that present-value dollars are always less than nominal dollars, and it therefore takes longer to receive a fixed dollar amount back in terms of present-value dollars rather than in nominal terms.

ST15.2 Decision Rule Conflict. Kate O'Brien has been retained as a management consultant by Winfred-Louder, a local department store, to analyze two proposed capital investments, projects X and Y. Project X is a sophisticated working capital and inventory control system based upon a powerful personal computer, called a system server, and PC software specifically designed for inventory processing and control in the retailing business. Project Y is a similarly sophisticated working capital and inventory control system based upon a powerful personal computer and general purpose PC software. Each project has a cost of $10,000, and the cost of capital for both projects is 12%. The projects' expected net cash flows are as follows:

Expected Net Cash Flow

Year

Project X

Project Y

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