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

1)
	Payback Period		3.86	Years
	Working:
	Payback period is the time upto which cost of project is recovered back.
	Period	Cash flow	Cumulative Cash flow
	0	$       -2,57,000	$ -2,57,000
	1	47,400	-2,09,600
	2	52,300	-1,57,300
	3	75,600	-81,700
	4	94,800	13,100
	5	1,25,900	1,39,000
	Payback Period		=	3+(81700/94800)
			=	3.86
2)
	Break even time		4.54	Years
	Working:
	Break even time is the time upto 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	$       -2,57,000	1.0000	$-2,57,000.00	$    -2,57,000.00
	1	$             47,400	0.9174	43,486.24	-2,13,513.76
	2	$             52,300	0.8417	44,019.86	-1,69,493.90
	3	$             75,600	0.7722	58,377.07	-1,11,116.83
	4	$             94,800	0.7084	67,158.71	-43,958.12
	5	$         1,25,900	0.6499	81,826.36	37,868.24
	Break even time		=	4+(43958.12/81826.36)
			=	4.54
3)
	Net Present Value of Investment			$      37,868.24