Question

Problem 24-6A Payback period, break-even time, and net present value LO P1, A1

Lenitnes Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $265,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 4 years, and it requires a 10% return on its 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		$	123,100
2			92,300
3			70,800
4			53,000
5			48,700

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. (Round your Payback Period answer to 1 decimal place. Enter cash outflows with a minus sign.)

	Year Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) 0 $(265,000) 1 2 3 4 5 Payback period =

Determine the break-even time for this investment. (Round your Payback Period answer to 1 decimal place. Enter cash outflows with a minus sign.)

	Year Cash inflow (outflow) Table factor Present Value of Cash Flows Cumulative Present Value of Cash Flows 0 $(265,000) 1 2 0.8264 3 0.7513 4 0.6830 5 0.6209 Break-even time =

Determine the net present value for this investment.

	Net present value

Answer 1

Solution 1:

Computation of Cumulative Cash Inflows
Period	Cash inflows	Cumulative Cash Inflows
1	$123,100.00	$123,100.00
2	$92,300.00	$215,400.00
3	$70,800.00	$286,200.00
4	$53,000.00	$339,200.00
5	$48,700.00	$387,900.00

Payback period = 2 years + ($265,000 - $215400) / $70,800 = 2.7 years

Solution 2:

Computation of Present value of cash flows and Cumulative PV of cash flows
Period	Cash Flows	PV factor	Present Value	Cumulative PV of Cash Flows
0	-$265,000.00	1.000000	-$265,000.00	-$265,000.00
1	$123,100.00	0.909091	$111,909.09	-$153,090.91
2	$92,300.00	0.826446	$76,280.99	-$76,809.92
3	$70,800.00	0.751315	$53,193.09	-$23,616.83
4	$53,000.00	0.683013	$36,199.71	$12,582.88
5	$48,700.00	0.620921	$30,238.87	$42,821.75
Total			$42,821.75

Breakeven time for the investment = 3 years + ($23,616.83 / $36199.71) = 3.65 years

Solution 3:

Computation of Net Present Value
Period	Cash Flows	PV factor	Present Value
0	-$265,000.00	1.000000	-$265,000.00
1	$123,100.00	0.909091	$111,909.09
2	$92,300.00	0.826446	$76,280.99
3	$70,800.00	0.751315	$53,193.09
4	$53,000.00	0.683013	$36,199.71
5	$48,700.00	0.620921	$30,238.87
NPV			$42,821.75