Question

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $245,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 3 years, and it requires a 8% 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 $ 47,500 2 52,100 3 75,800 4 94,500 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.

Answer 1

Year	Cash Inflows (outflows)	Cumulative Net Cash inflow (outflow)
0	$    (245,000)	$    (245,000)
1	$         47,500	$    (197,500)
2	$         52,100	$    (145,400)
3	$         75,800	$      (69,600)
4	$         94,500	$         24,900
5	$      126,100	$      151,000
	$      151,000
Payback occurs between year 3 and 4
	69600	0.736507937
	94500
Payback period =	3.73 years

Year	Cash Inflows (outflows)	table factor	Present values of cash flows	Cumulative Present Values
0	$    (245,000)	1	$           (245,000)	$          (245,000)
1	$         47,500	0.9259	$               43,981	$          (201,019)
2	$         52,100	0.8573	$               44,667	$          (156,351)
3	$         75,800	0.7938	$               60,172	$            (96,179)
4	$         94,500	0.7350	$               69,460	$            (26,718)
5	$      126,100	0.6806	$               85,822	$              59,103
	$      151,000
break Even time occurs between year 4 and year 5
	$         26,718	0.311324647
	$         85,822
Breakeven period =	4.3 years

Year	Cash Inflows (outflows)	table factor	Present values of cash flows
0	$    (245,000)	1	$           (245,000)
1	$         47,500	0.9259	$               43,981
2	$         52,100	0.8573	$               44,667
3	$         75,800	0.7938	$               60,172
4	$         94,500	0.7350	$               69,460
5	$      126,100	0.6806	$               85,822
	$      151,000	NPV =	$               59,103