Logan's Company is interested in purchasing a state-of-the-art machinery for its manufacturing plant. This new machine...

Logan's Company is interested in purchasing a state-of-the-art machinery for its manufacturing plant. This new machine will cost $100,000 and will have no salvage value at the end of its 5 year useful life. The projected net cash inflows for the 5 years are $32,000, $57,000, $5,000, $28,000, and $16,000. Logan's Company cost of capital rate is 10%.

a.) What is the payback period? Express your answer in 2 places after decimal.

b.)What is the net present value of this investment?

Expert Solution

a) Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3+ ( 6000 / 28000)

= 3.21 Years

Hence the correct answer is 3.21 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-1,00,000.00	-	-1,00,000.00	(Investment + Cash Inflow)
1	-	32,000	-68,000.00	(Net Cash Flow + Cash Inflow)
2	-	57,000	-11,000.00	(Net Cash Flow + Cash Inflow)
3	-	5,000	-6,000.00	(Net Cash Flow + Cash Inflow)
4	-	28,000	22,000.00	(Net Cash Flow + Cash Inflow)
5	-	16,000	38,000.00	(Net Cash Flow + Cash Inflow)

b) Net Present Value = Present Value of Cash inflows - Present Value of Cash outflows

= $ 32,000 * 1/(1.10) ^ 1 + $ 57,000* 1/(1.10) ^2 + $ 5,000* 1/(1.10) ^3 + $ 28,000* 1/(1.10) ^4 + $ 16,000* 1/(1.10) ^5 - $ 100,000

= $ 9,014.04

Hence the correct answer is $ 9,014.04

ekkarill92 answered 1 year ago

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