The management of Unter Corporation, an architectural design firm, is considerin
ID: 2528687 • Letter: T
Question
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
Required:
1. Determine the payback period of the investment.
2. Would the payback period be affected if the cash inflow in the last year were several times as large?
.
The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 12%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
Required:
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
Year Investment Cash Inflow 1 $ 15,000 $ 1,000 2 $ 8,000 $ 2,000 3 $ 2,500 4 $ 4,000 5 $ 5,000 6 $ 6,000 7 $ 5,000 8 $ 4,000 9 $ 3,000 10 $ 2,000Explanation / Answer
As per policy only first question will be answered
For payback period first calculate cumulative cashflows
Payback period = 6+(2500/5000)=6.50 years
Payback period would have been not affected even if cash inflows in the last year would have been several times large because invested amount will be recovered before the last cash inflow. If cash inflows would have been large in initial years then surely back period would have been affected.
Year cumulative cashflows 1 -14000 2 -20000 3 -17500 4 -13500 5 -8500 6 -2500 7 2500 8 6500 9 9500 10 11500Related Questions
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