Question

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $247,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 2 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 $ 48,200 2 53,200 3 75,900 4 94,600 5 126,800 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.

Answer 1

Requirement 1

Year	Cash Inflows (outflows)	Cumulative Net Cash inflow (outflow)
0	$                                 (247,000)	$           (247,000)
1	$                                      48,200	$           (198,800)
2	$                                      53,200	$           (145,600)
3	$                                      75,900	$             (69,700)
4	$                                      94,600	$                24,900
5	$                                   126,800	$             151,700
	$                                   151,700

Payback Period =	A+	B
		C
In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Payback Period =	3+	$            69700.00
		$            94600.00
Payback Period =	(3+0.74)=	3.74	Years

Requirement 2

Breakeven time is nothing but payback period with discounted cash flows.

Breakeven time is calculated below

Year	Cash Inflows (outflows)	table factor	Present values of cash flows	Cumulative Present Values
0	$ (247,000)	1	$                              (247,000)	$ (247,000)
1	$       48,200	0.9091	$     43,818	$ (203,182)
2	$       53,200	0.8264	$     43,967	$ (159,215)
3	$       75,900	0.7513	$       57,025	$ (102,190)
4	$       94,600	0.6830	$        64,613	$    (37,577)
5	$     126,800	0.6209	$         78,733	$      41,156
	$     151,700

Breakeven time =	A+	B
		C
In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Breakeven time =	4+	$            37577.00
		$            78733.00
Breakeven time =	(4+0.48)=	4.48	Years

Requirement 3

Net Present value = $41,156

Year	Cash Inflows (outflows)	table factor	Present values of cash flows
0	$ (247,000)	1	$     (247,000)
1	$       48,200	0.9091	$          43,818
2	$       53,200	0.8264	$          43,967
3	$       75,900	0.7513	$          57,025
4	$       94,600	0.6830	$          64,613
5	$     126,800	0.6209	$          78,733
Net Present value			$          41,156