Question

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $257,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 3 years, and it requires a 9% 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		$	47,400
2			52,300
3			75,600
4			94,800
5			125,900

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

period	cash flow	Discount factor (9%)	discounted cash flow	investment recovered
0	---	---	---	257,000
1	47,400	0.9174	43485	209,600
2	52,300	0.8417	44021	157,300
3	75,600	0.7722	58378	81,700
4	94,800	0.7084	67156	-13,100
5	125,900	0.6499	81822	-139,000
			294863

Requirement-1

Payback period = years before full recovery + (Unrecovered investment at start of the year/Cash flow during the year)

= 3 + (81,700 / 94,800)

= 3 + 0.86

= 3.86 years

Requirement-2

Break even time for investment is 3.86 years as an initial investment will be recover at this point of time and then after company will make a profit from the investment.

Requirement-3

NPV = present value - initial investment

= 294,863 - 257,000

= 37,863