Question

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $253,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 3 years, and it requires a 7% 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		$	47,900
2			53,400
3			76,700
4			95,700
5			126,100

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.)

	Year Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) 0 $(253,000) 1 2 3 4 5 Payback period =

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.)

	Year Cash inflow (outflow) Table factor Present Value of Cash Flows Cumulative Present Value of Cash Flows 0 $(253,000) 1 2 3 4 5 Break-even time =

Determine the net present value for this investment.

	Net present value

Answer 1

All Answers are solved as following

Requirement 1
Year	Cash Inflow(outflow)	Cumulative Net Cash Inflow(Outflow)
0	$              (253,000)	$        (253,000)
1	$             47,900	$        (205,100)
2	$             53,400	$        (151,700)
3	$             76,700	$          (75,000)
4	$             95,700	$             20,700
5	$            126,100	$          146,800
Payback period lies between 3rd and 4th year
it will be calculated as following
Pay back period = 3rd year + Cumulative for 3rd year/Total inflow for 4th year
	= 3rd year + 75000/95700
	= 3+.78
	=3.78 or 3.8 rounded off to single decimal
Payback period	=3.8 years

Requirement 2 Break even time

Requirement 2
Year	Cash Inflow(outflow)	present Value Factor @ 75		Cumulative Net Cash Inflow(Outflow)
0	$              (253,000)	1	$     (253,000)	$       (253,000)
1	$             47,900	0.935	$         44,787	$       (208,214)
2	$             53,400	0.873	$         46,618	$       (161,595)
3	$             76,700	0.816	$         62,587	$          (99,008)
4	$             95,700	0.763	$         73,019	$          (25,989)
5	$            126,100	0.713	$         89,909	$            63,920
Break even point lies between 4th and 5th year
it will be calculated as following
Break even time = 4th year + Cumulative PV upto 4th year/PV of Total inflow for 5th year
	=4+25989/89909
	=4+.29
	=4.29 or 4.3 rounded off to single decimal
Break even time	=4.3 years

Requirement 3 NPV

Net Present Value

$             63,920

(as Calculated above in Second Answer Last Cumulative for 5th year is NPV)

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