Sentinel Company is considering an investment in technology to improve its opera
ID: 2437713 • Letter: S
Question
Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $245,000 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 $ 47,500 2 52,100 3 75,800 4 94,500 5 126,100
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.
Explanation / Answer
Year
Cash Inflows (outflows)
Cumulative Net Cash inflow (outflow)
0
$ (245,000)
$ (245,000)
1
$ 47,500
$ (197,500)
2
$ 52,100
$ (145,400)
3
$ 75,800
$ (69,600)
4
$ 94,500
$ 24,900
5
$ 126,100
$ 151,000
$ 151,000
Payback occurs between year 3 and 4
69600
0.736507937
94500
Payback period =
3.73 years
Year
Cash Inflows (outflows)
table factor
Present values of cash flows
Cumulative Present Values
0
$ (245,000)
1
$ (245,000)
$ (245,000)
1
$ 47,500
0.9259
$ 43,981
$ (201,019)
2
$ 52,100
0.8573
$ 44,667
$ (156,351)
3
$ 75,800
0.7938
$ 60,172
$ (96,179)
4
$ 94,500
0.7350
$ 69,460
$ (26,718)
5
$ 126,100
0.6806
$ 85,822
$ 59,103
$ 151,000
break Even time occurs between year 4 and year 5
$ 26,718
0.311324647
$ 85,822
Breakeven period =
4.3 years
Year
Cash Inflows (outflows)
table factor
Present values of cash flows
0
$ (245,000)
1
$ (245,000)
1
$ 47,500
0.9259
$ 43,981
2
$ 52,100
0.8573
$ 44,667
3
$ 75,800
0.7938
$ 60,172
4
$ 94,500
0.7350
$ 69,460
5
$ 126,100
0.6806
$ 85,822
$ 151,000
NPV =
$ 59,103
Year
Cash Inflows (outflows)
Cumulative Net Cash inflow (outflow)
0
$ (245,000)
$ (245,000)
1
$ 47,500
$ (197,500)
2
$ 52,100
$ (145,400)
3
$ 75,800
$ (69,600)
4
$ 94,500
$ 24,900
5
$ 126,100
$ 151,000
$ 151,000
Payback occurs between year 3 and 4
69600
0.736507937
94500
Payback period =
3.73 years
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