Requirement 1. Calculate the payback period and the discounted payback period fo

Question

Requirement 1. Calculate the payback period and the discounted payback period for this investment, assuming Merganser expects to generate $160,000 in incremental revenues every year from the new machines. (Round your answer to two decimal places.) The payback period for the investment assuming uniform net cash inflows is ars. The discounted payback period for the investment assuming uniform net cash inflows isears Requirement 2. Assume instead that Merganser expects an uneven stream of incremental cash revenues from installing the new washing machines. Based on this estimated revenue stream, what are the payback and discounted payback periods for the investment? Start by determining the net initial investment unrecovered amounts at the end of each year by first entering the net cash inflow(outflow) amounts and then calculating the cumulative net cash flows for each year. (Use a minus sign or parentheses for net cash outflows and to show negative cumulative net cash flows. Once the net initial investment is fully recovered enter a zero for that year's line and for each subsequent year's line in the "net initial investment unrecovered at end of year" column.) Net Cash Cumulative Net Net initial investment Year Inflowl(Outflow) Cash Flows unrecovered at end of year 0) 92.0 Using the table you completed above and straight-line interpolation, calculate the investment's payback. (Round your answer to two decimal places.) The payback period for the investment assuming nonuniform net cash inflows is 4.70 years.

Explanation / Answer

1 . Even cash flow revenues Ordinary pay back period Incremental revenues 150000 Incremental costs Fixed 80000 Variable costs 5%*150000 7500 Total costs 87500 Incremental net revenue 62500 Ordinary pay back period= Initial investment/ Annual net revenues Ordinary pay back period=191000/62500= 3.1 years Discounted pay-back: Year 0 1 2 3 4 5 6 7 8 9 Initial investment -191000 Incl.Net revenues 62500 62500 62500 62500 62500 62500 62500 62500 62500 Net annual cash flows -191000 62500 62500 62500 62500 62500 62500 62500 62500 62500 PV F at 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 PV at 10% -191000 56818 51653 46957 42688 38808 35280 32072 29157 26506 Cumulative cash flows -191000 -134182 -82529 -35572 7117 45924 81204 113276 142433 168939 Discounted payback period=3+(35572/42688)= 3.8 years 2. Uneven incremental cash revenues Year 0 1 2 3 4 5 6 7 8 9 Initial investment -191000 Incl. revenues 95000 95000 150000 120000 190000 180000 150000 120000 195000 Less: Incl.costs Fixed costs 80000 80000 80000 80000 80000 80000 80000 80000 80000 Variable costs 5%*Revenues 4750 4750 7500 6000 9500 9000 7500 6000 9750 Total costs 84750 84750 87500 86000 89500 89000 87500 86000 89750 Net incl.revenues 10250 10250 62500 34000 100500 91000 62500 34000 105250 Net annual cash flows -191000 10250 10250 62500 34000 100500 91000 62500 34000 105250 Cumulative cash flows -191000 -180750 -170500 -108000 -74000 26500 117500 180000 214000 319250 Ordinary payback period=4+(74000/100500)= 4.7 Years PV F at 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 PV at 10% -191000 9318 8471 46957 23222 62403 51367 32072 15861 44636 Cumulative cash flows -191000 -181682 -173211 -126254 -103031 -40629 10739 42811 58672 103309 Discounted payback period=5+(40629/51367)= 5.8 years

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