In 2020 the come is considering purchasing new equipment for their Marine Engine Division. The annual...
In 2020 the come is considering purchasing new equipment for their Marine Engine Division. The annual cash inflow for the new equipment is $1,000,000. A $2,000,000 net initial investment is required, and the machine has a five-year useful life and an 8% required rate of return. The investment will happen immediately after management approves the project. a) Calculate the payback period using discounted cash flows. Assume all cash inflows and outflows occur at the end of the period. (30 marks)
Homework Answers
| Calcalation of discounted payback period | ||||
| Year | Cash flows | PVF | PV of cash flows | Cumulative Discounted cash flows |
| 0 | -2000000 | 1 | -2000000 | -2000000 |
| 1 | 1000000 | 0.925925926 | 925925.9259 | -1074074.074 |
| 2 | 1000000 | 0.85733882 | 857338.8203 | -216735.2538 |
| 3 | 1000000 | 0.793832241 | 793832.241 | 577096.9872 |
| 4 | 1000000 | 0.735029853 | 735029.8528 | 1312126.84 |
| 5 | 1000000 | 0.680583197 | 680583.197 | 1992710.037 |
| Hence, discounted payback period = 2 + 216735/793832.2 = 2.2730 years |
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