Sentinel Company is considering an investment in technology to improve its opera

Question

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $242,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 2 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 $47,400 53,000 75,400 95,800 125,300 2 4 Required 1. Determine the payback period for this investment. (Enter cash outflows with a minus sign. Round your Payback Period answer to 1 decimal place.) Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) Year S (242,000) 2 4 5 Payback period

Explanation / Answer

Sentinel Company

Year

Cash inflow (outflow)

Cummulative net cash inflow (outflow)

0

($242,000)

($242,000)

1

$47,400

($194,600)

2

$53,000

($141,600)

3

$75,400

($66,200)

4

$95,800

29,600

5

$125,300

$154,900

$154,900

Payback period lies between Year 3 and Year 4.

Determination of the exact period of payback in Year 3 –

Numerator for partial year = $66,200

Denominator for partial year = $95,800

= $66,200/$95,800 = 0.69 = 0.7

Payback period = 3.7 years

Year

Cash inflow (outflow)

Table Factor

Present Value of Cash Flows

Cumulative Present Value of Cash Flows

0

($242,000)

1

($242,000)

($242,000)

1

$47,400

0.9259

$43,888

($198,112)

$2

$53,000

0.8573

$45,437

($152,675)

3

$75,400

0.7938

$59,853

($92,822)

$4

$95,800

0.735

$70,413

($22,409)

5

$125,300

0.6806

$85,279

$62,870

3.9926

$$62,870

Calculation of break-even time –

Break-even time lies between Year 4 and Year 5.

Calculation of the period of the year,

Numerator for partial year = $22,409

Denominator for partial year = $85,279

= $22,409/$85,279 = 0.26 = 0.3

Hence, break-even time for the investment = 4.3 years

Net present value = $62,870

Year

Cash inflow (outflow)

Cummulative net cash inflow (outflow)

0

($242,000)

($242,000)

1

$47,400

($194,600)

2

$53,000

($141,600)

3

$75,400

($66,200)

4

$95,800

29,600

5

$125,300

$154,900

$154,900

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