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.

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 $(247,000) 1 2 0 3 0 4 0 5 0 0 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 $(247,000) 1 2 3 0 4 0 5 0 0 Break-even time = etermine the net present value for this investment. Net present value

Answer 1

1. Pay back period

Years	Cash outflow	Cash inflows	Cumulative Cash flows
0	(247,000)
1		48,200,
2		53,200	1,01,400
3		75,900	1,77,300
4		94,600	2,71,900
5		126,800	3,98,700

Payback period = 3 .7367 years. In the year 3, the company can recover the initial investment of 177300 but the remaining 69700 can be collected from the cash inflow of fourth year.

Initial investment = -247000

247000 – 177300 = 69700

The exact pay back period = 69700 /   94600 = 0.7367

Payback period = 3 .7367 years = 3.7

2.

Years	Cash outflow	Cash inflows	Present value factor	Present value of cash inflows	Cumulative cash flows
0	(247,000)
1		48,200,	0.909	43813.8
2		53,200	0.826	43943.2	87757
3		75,900	0.751	57000.9	144757.9
4		94,600	0.683	64611.8	209369.7
5		126,800	0.621	78742.8	288112.5

The initial investment - 247,000 the break in time = 4 years + 0.7239

4 years + 7 months

= 247000 – 209369.7 = 189999.1 = 247000 – 189999.1 = 57000.9

= 57000.9/78742.8 = 0.7239

Break even time = 4.7239 = 4.7

3. Net Present Value =

Summation of present value of Cash in flows – Cash inflows = 288112.5 – 247000 = 41112.5

If NPV is positive, we can accept the project. In this project evaluation, the Npv is positive so we can accept the project.