Sentinel Company is considering an investment in technology to improve its opera

Question

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $255,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 2 years, and it requires a 8% 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 Period Flow 1 $48,800 2 53,300 3 76,200 4 94,600 5 126,000 Required 1. Determine the payback period for this investment. (Enter cash outflows with a minus sign. Round your Payback Period answer to 1 decimal place.) Cash inflow Cumulative Net (outflow)(outflow) Year Cash Inflow 0 $ (255,000) 2 4 Payback period

Explanation / Answer

1. The pay back period:

Pay back period of the investment = 3 + (255000 - 178300) / 94600 = 3.81 years

2. The break even time for the investment:

Break Even Time of the investment = 5 * (255000 / 306653) = 5 * 83.16% = 4.16 years

3. NPV = $306653 - $255000 = $51653

Year Cash inflow (outflow) $ cummulative cash inflow (outflow) $ 0 (255000) 1 48800 48800 2 53300 102100 3 76200 178300 4 94600 272900 5 126000 398900

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