Sentinel Company is considering an investment in technology to improve its operations. The investment will require...
Sentinel Company is considering an investment in technology to
improve its operations. The investment will require an initial
outlay of $258,000 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 | $ | 48,800 | ||
| 2 | 53,900 | |||
| 3 | 75,900 | |||
| 4 | 95,900 | |||
| 5 | 125,400 | |||
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.
Homework Answers
Solution 1:
| Year | Cash inflows (Outflow) | Cumulative Cash inflow (Outflow) |
| 0 | -$258,000.00 | -$258,000.00 |
| 1 | $48,800.00 | -$209,200.00 |
| 2 | $53,900.00 | -$155,300.00 |
| 3 | $75,900.00 | -$79,400.00 |
| 4 | $95,900.00 | $16,500.00 |
| 5 | $125,400.00 | $141,900.00 |
| Calculate the portion of the year: | 3 | |
| Numerator for partial year | $79,400.00 | |
| Denominator for partial year | $95,900.00 | |
| Payback period = | 3.8 | Years |
Solution 2:
| Chart values are based on: | ||||
| i= | 8% | |||
| Year | Cash inflows (Outflow) | Table Factor | Present value of cash flows | Cumulative Present value of Cash inflow (Outflow) |
| 0 | -$258,000.00 | 1.0000 | -$258,000 | -$258,000 |
| 1 | $48,800.00 | 0.9259 | $45,185 | -$212,815 |
| 2 | $53,900.00 | 0.8573 | $46,211 | -$166,604 |
| 3 | $75,900.00 | 0.7938 | $60,252 | -$106,352 |
| 4 | $95,900.00 | 0.7350 | $70,489 | -$35,863 |
| 5 | $125,400.00 | 0.6806 | $85,345 | $49,482 |
| Calculate the portion of the year: | 4 | |||
| Numerator for partial year | $35,863.00 | |||
| Denominator for partial year | $85,345.00 | |||
| Breakeven time = | 4.42 | Years |
Solution 3:
| Computation of NPV - Sentinel Company | ||||
| Particulars | Amount | Period | PV Factor | Present Value |
| Cash Outflows: | ||||
| Cost of Equipment | $258,000.00 | 0 | 1 | $258,000 |
| Present Value of Cash Outflows (A) | $258,000 | |||
| Cash Inflows: | ||||
| Annual cash inflows: | ||||
| Year 1 | $48,800.00 | 1 | 0.92593 | $45,185 |
| Year 2 | $53,900.00 | 2 | 0.85734 | $46,211 |
| Year 3 | $75,900.00 | 3 | 0.79383 | $60,252 |
| Year 4 | $95,900.00 | 4 | 0.73503 | $70,489 |
| Year 5 | $125,400.00 | 5 | 0.68058 | $85,345 |
| Present Value of Cash Inflows (B) | $307,482 | |||
| Net Present Value (B-A) | $49,482 | |||
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