Sentinel Company is considering an investment in technology to improve its opera
ID: 2491264 • Letter: S
Question
Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $243,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 3 years, and it requires a 10% return on investments. (PV of $1,FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the table provided.)
Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $243,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 3 years, and it requires a 10% return on investments. (PV of $1,FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the table provided.)
Period Cash Flow 1 47,200 52,800 75,500 94,800 125,100 4 5
Explanation / Answer
1.Calculation of payback period
Year
Cash Flow
Cumulative Cash Flow
0
(243,000)
(243,000)
1
47,200
(195,800)
2
52,800
(143,000)
3
75,500
(67,500)
4
94,800
5
125,100
Payback period = 3 years + 67,500/94,800 = 3.7 years
2.Break even time for investment
Year
Cash Flow
Table factor
(10%)
Present value of cash flow
Present value of Cumulative Cash Flow
0
(243,000)
1
(243,000)
(243,000)
1
47,200
0.91
42,952
(200,048)
2
52,800
0.83
43,824
(156,224)
3
75,500
0.75
56,625
(99,599)
4
94,800
0.68
64,464
(35,135)
5
125,100
0.62
77,562
Break even time = 4 years + 35,135/77,562 = 4.5 years
3.Calculation of Net present value
Year
Cash Flow
Table factor
(10%)
Present value of cash flow
0
(243,000)
1
(243,000)
1
47,200
0.91
42,952
2
52,800
0.83
43,824
3
75,500
0.75
56,625
4
94,800
0.68
64,464
5
125,100
0.62
77,562
Net Present value
42,427
Year
Cash Flow
Cumulative Cash Flow
0
(243,000)
(243,000)
1
47,200
(195,800)
2
52,800
(143,000)
3
75,500
(67,500)
4
94,800
5
125,100
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