Problem 24-5A Payback period, break-even time, and net present value LO P1, A1 S

Question

Problem 24-5A Payback period, break-even time, and net present value LO P1, A1

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $252,000 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.)

Required:
1. Determine the payback period for this investment.
2. Determine the break-even time for this investment.
3. Determine the net present value for this investment.

Determine the payback period for this investment. (Enter cash outflows with a minus sign. Round your Payback Period answer to 1 decimal place.)

Determine the break-even time for this investment. (Enter cash outflows with a minus sign. Round your break-even time answer to 1 decimal place.)

Determine the net present value for this investment.

Period Cash Flow 1 $ 47,300 2 52,000 3 76,900 4 95,100 5 125,900

Explanation / Answer

1

Calculation of payback period for the project

Period

Cash flows

Cumulative cashflows

1

$47,300

$47,300

2

$52,000

$99,300

3

$76,900

$176,200

4

$95,100

$271,300

5

$125,900

$397,200

Total

$397,200

Initial Investment

$252,000

Payback period is between 3 to 4 years

3.80 years

(3years+(252,000-176,200)/95,100

2

Break-even time for this investment

Year

Cash flows

Table factor

Present value of cash flows

Cumulative Present Value of Cash Flows

1

$47,300

0.90909

$43,000

$43,000

2

$52,000

0.82645

$42,975

$85,975

3

$76,900

0.75131

$57,776

$143,751

4

$95,100

0.68301

$64,955

$208,706

5

$125,900

0.62092

$78,174

$286,880

Present value of cash inflows

$286,880

Initial Investment

$252,000

Payback period is between 4 to 5 years

                     4.554 years

(4 years+(252,000-208,706)/78,174

3

Net present value = present value of cash inflows - Present value of cash outflows

Present value of cash inflows

$286,880

Present value of cash outflows

$252,000

NPV

$34,880

1

Calculation of payback period for the project

Period

Cash flows

Cumulative cashflows

1

$47,300

$47,300

2

$52,000

$99,300

3

$76,900

$176,200

4

$95,100

$271,300

5

$125,900

$397,200

Total

$397,200

Initial Investment

$252,000

Payback period is between 3 to 4 years

3.80 years

(3years+(252,000-176,200)/95,100

2

Break-even time for this investment

Year

Cash flows

Table factor

Present value of cash flows

Cumulative Present Value of Cash Flows

1

$47,300

0.90909

$43,000

$43,000

2

$52,000

0.82645

$42,975

$85,975

3

$76,900

0.75131

$57,776

$143,751

4

$95,100

0.68301

$64,955

$208,706

5

$125,900

0.62092

$78,174

$286,880

Present value of cash inflows

$286,880

Initial Investment

$252,000

Payback period is between 4 to 5 years

                     4.554 years

(4 years+(252,000-208,706)/78,174

3

Net present value = present value of cash inflows - Present value of cash outflows

Present value of cash inflows

$286,880

Present value of cash outflows

$252,000

NPV

$34,880

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