stion 4 0 out of 1 points Company X invested in a piece of equipment with an ini
ID: 2437789 • Letter: S
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stion 4 0 out of 1 points Company X invested in a piece of equipment with an initial cost of $80,000. The with an estimated life of 10 years and no salvage value. Th equipment is expected to provide net cash flows of $18,000 per year e company's cost of capital is 14%. The payback period using the modified payback method and without considering the impact of taxes is: Selected Answer: O [None Given) Correct Answer b. 7.45 years Feedback: year 0, the cash flow 80,000. For year 1, the discounted cash flow 18,000/1.14-15,789.5-Cumulative discounted net cash flow years it takes for the sum of discounted net cash flows from the project becomes zero. For at the end of year 1--80,000 15,789.5--64,210.5. Similarly, the di cash flow for year 2 $18,000/1.142-13,850.4- net cash flow at the end of year 7- -2,810.5 and at the end of year 8-3,499.55. This implies that the ative discounted net cash flow at the end of the year 2-64,210.5+13,850.4- -50,360.1. In the same manner, we can find that the c cumulative discounted net cash flows becomes zero between years 7 and 8. Assum year, the time for cumulative net cash flow to become zero-2,810.5/2,810.5-3,499.55) 0.45 year. The modified payback period-7.45 years. ing that the cash flow occurs uniformly through theExplanation / Answer
Years
Cash inflow
Pv factor at 14%
Present value of cash flow
Discounted net cash flows
(a)
(b)
[c]
[d= b*c]
[E= $80000-Pv of CF]
80000
1
18000
0.8771
15787.8
64212.2
2
18000
0.7693
13847.4
50364.8
3
18000
0.6748
12146.4
38218.4
4
18000
0.5919
10654.2
27564.2
5
18000
0.5192
9345.6
18218.6
6
18000
0.4554
8197.2
10021.4
7
18000
0.3994
7189.2
2832.2
8
18000
0.3503
6305.4
-3473.2
Particulars
$
Cumulative cash flow for Year 7
2832.2
Cumulative cash flow for year 8
-3473.2
Difference amount
-6305.4
Number of years
7 years + (2832.2)/6305.4
7.45 years
Years
Cash inflow
Pv factor at 14%
Present value of cash flow
Discounted net cash flows
(a)
(b)
[c]
[d= b*c]
[E= $80000-Pv of CF]
80000
1
18000
0.8771
15787.8
64212.2
2
18000
0.7693
13847.4
50364.8
3
18000
0.6748
12146.4
38218.4
4
18000
0.5919
10654.2
27564.2
5
18000
0.5192
9345.6
18218.6
6
18000
0.4554
8197.2
10021.4
7
18000
0.3994
7189.2
2832.2
8
18000
0.3503
6305.4
-3473.2
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