Question

Lenitnes Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $266,000 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 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		$	123,900
2			92,200
3			70,600
4			53,400
5			47,000

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

1)
	Payback Period		2.71 Years
	Working:
	Payback period is the time upto which cost of project is recovered back.
	Period	Cash flow	Cumulative Cash flow
	0	$       -2,66,000	$ -2,66,000
	1	1,23,900	-1,42,100
	2	92,200	-49,900
	3	70,600	20,700
	4	53,400	74,100
	5	47,000	1,21,100
	Payback Period		=	2+(49900/70600)
			=	2.71
2)
	Break even time		3.66 Years
	Working:
	Break even time is the time up to cost of project and present value of cash inflows are equal.
	Period	Cash flow	Present Value of a 1	Present Value of a cash flows	Cumulative present value of Cash flow
	0	$       -2,66,000	1.0000	$-2,66,000.00	$    -2,66,000.00
	1	1,23,900	0.9091	1,12,636.36	-1,53,363.64
	2	92,200	0.8264	76,198.35	-77,165.29
	3	70,600	0.7513	53,042.82	-24,122.46
	4	53,400	0.6830	36,472.92	12,350.45
	5	47,000	0.6209	29,183.30	41,533.76
	Break even time		=	3+(24122.46/36472.92)
			=	3.66
3)
	Net Present Value of Investment			$ 41,533.76