Question

Problem 3: A manufacturing equipment investment of $250,000 is expected to generate the following cash flows over the next five years: Yr Add'l Cash Sales Cost Annual Savings machin e mainten ance Expens es 1 2 3 4 $30,000 35,000 30,000 35,000 35,000 $4,000 12,000 10,000 10,000 10,000 $6,000 15,000 12,000 14,000 14,000 5 Required: A. Draw a cash flow timeline for the proposal. B. Compute payback period of the investment. C. Should the investment be made if management wants to recover the initial investment in 2 years or less?

Answer 1

1. In above case Initial Investment of $2,50,000 is much higher than it's inflow over a next five years.

Following Table show Computation of Net Present Value assuming 10% Discount Factor, which is Negative ($1,36,980)

Year	Addl Cash Sales	Cost Savings	Annual Machine Maintainence Expense	Net Cash Flow	Assumption- Discounting Factor @ 10%	Present Value
0	($250,000)			($250,000)	1.00	(250,000)
1	$30,000	$4,000	$6,000	$28,000	0.91	25,480
2	$35,000	$12,000	$15,000	$32,000	0.82	26,240
3	$30,000	$10,000	$12,000	$28,000	0.75	21,000
4	$35,000	$10,000	$14,000	$31,000	0.68	21,080
5	$35,000	$10,000	$14,000	$31,000	0.62	19,220
Net Present Value				($100,000)		(136,980)

2. Computation of Payback period is not possible, because Outflow is greater than Inflow.

3. Suggested to Management not to Buy this Equipemnt, because Inflow is lesser than Outflow.