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 8% 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		$	48,500
2			52,900
3			75,900
4			94,700
5			126,900

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.

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

	Year Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) 0 $(257,000) 1 2 0 3 0 4 0 5 0 0 Payback period =

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

	Year Cash inflow (outflow) Table factor Present Value of Cash Flows Cumulative Present Value of Cash Flows 0 $(257,000) 1 2 3 0 4 0 5 0 0 Break-even time =

Determine the net present value for this investment.

	Net present value

Answer 1

1. Payback Period = 3.8 Years

Year	Cash Inflow	Cumulative Net Cash Inflow
0	$             (257,000)	$          (257,000)
1	$                 48,500	$          (208,500)
2	$                 52,900	$          (155,600)
3	$                 75,900	$            (79,700)
4	$                 94,700	$               15,000
5	$               126,900	$            141,900
Payback occurs between year :		3	and year	4
Portion of the Year
Unrecovered investment		$               79,700	0.8	Years
Cash flow during the year		$               94,700
Payback Period		3.8	Years

*

Payback Period

=

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

2. Break-Even Time = 4.3 Years

Year	Cash Inflow (Outflow)	Table Factor	Present Value of Cash Flows	Cumulative Present Value of Cash Flows
0	$             (257,000)	1.00000	$         (257,000)	$         (257,000)
1	$                 48,500	0.92593	$             44,908	$         (212,092)
2	$                 52,900	0.85734	$             45,353	$         (166,739)
3	$                 75,900	0.79383	$             60,252	$         (106,487)
4	$                 94,700	0.73503	$             69,607	$           (36,880)
5	$               126,900	0.68058	$             86,366	$             49,486
Breakeven Time is Between		4	and year	5
Portion of the Year
Unrecovered investment		$               36,880	0.3	Year
Cash flow during the year		$            126,900
Break-Even Time		4.3	Year

3. NPV = $ 49,486

Year	Cash Inflow	Table Factor	Present Value of Cash Flows
1	$                 48,500	0.92593	$             44,908
2	$                 52,900	0.85734	$             45,353
3	$                 75,900	0.79383	$             60,252
4	$                 94,700	0.73503	$             69,607
5	$               126,900	0.68058	$             86,366
Present Value of Cashflows			$           306,486
Less: Initial Outflow			$           257,000
Net Present Value			$             49,486

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