Problem 24-6A Payback period, break-even time, and net present value LO P1, A1 L

Question

Problem 24-6A Payback period, break-even time, and net present value LO P1, A1

Lenitnes Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $265,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 4 years, and it requires a 10% return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the table provided.)

  

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.

Determine the payback period for this investment. (Round your Payback Period answer to 1 decimal place. Enter cash outflows with a minus sign.)

Determine the break-even time for this investment. (Round your Payback Period answer to 1 decimal place. Enter cash outflows with a minus sign.)

Determine the net present value for this investment.

Period Cash Flow 1 $ 123,100 2 92,300 3 70,800 4 53,000 5 48,700

Explanation / Answer

Solution 1:

Payback period = 2 years + ($265,000 - $215400) / $70,800 = 2.7 years

Solution 2:

Breakeven time for the investment = 3 years + ($23,616.83 / $36199.71) = 3.65 years

Solution 3:

Computation of Cumulative Cash Inflows Period Cash inflows Cumulative Cash Inflows 1 $123,100.00 $123,100.00 2 $92,300.00 $215,400.00 3 $70,800.00 $286,200.00 4 $53,000.00 $339,200.00 5 $48,700.00 $387,900.00

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