Question
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Problem 24-6A Payback period, break-even time, and net present value LO P1, A1 Lenitnes Company is...
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.)
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Determine the break-even time for this investment. (Round your Payback Period answer to 1 decimal place. Enter cash outflows with a minus sign.)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Determine the net present value for this investment.
|
Solutions
Expert Solution
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 | ||
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