Sentinel Company is considering an investment in technology to improve its opera
ID: 2600118 • Letter: S
Question
Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $251,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 2 years, and it requires a 9% 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 $ 48,000 53,500 75,600 95,500 126,700 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 Complete this question by entering your answers in the tabs below.Explanation / Answer
1.
Year
Cash Flow
‘Cum Cash Flow
0
$ (251,000)
$ (251,000)
1
$ 48,000
$ (203,000)
2
$ 53,500
$ (149,500)
3
$ 75,600
$ (73,900)
4
$ 95,500
$ 21,600
5
$ 126,700
$ 148,300
Payback period = A + B/C
Where,
A = Last period with a negative cumulative cash flow = 3 years
B = Absolute value of cumulative cash flow at the end of the period A = $ 75,600
C = Total cash flow during the period after A = $ 95,500
Payback period = 3 + $ 75,600/$ 95,500 = 3 + 0.77 = 3.77 years.
2.
Year
Cash Flow
PV Factor Formula
PV Factor @ 9 %
Discounted Cash Flow
Dic. ‘Cum Cash Flow
0
$ (251,000)
1/(1.09)^0
1
$ (251,000)
$ (251,000)
1
$ 48,000
1/(1.09)^1
0.917431193
$ 44,037
$ (206,963)
2
$ 53,500
1/(1.09)^2
0.841679993
$ 45,030
$ (161,933)
3
$ 75,600
1/(1.09)^3
0.77218348
$ 58,377
$ (103,556)
4
$ 95,500
1/(1.09)^4
0.708425211
$ 67,655
$ (35,902)
5
$ 126,700
1/(1.09)^5
0.649931386
$ 82,346
$ 46,445
Discounted Payback period = A + B/C
Where,
A = Last period with a negative discounted cumulative cash flow = 4 years
B = Absolute value of discounted cumulative cash flow at the end of the period A = $ 35,902
C = Discounted cash flow during the period after A = $ 82,346
Discounted Payback period = 4 + $ 35,902/$ 82,346 = 4 + 0.44 = 4.44 years.
Breakeven time = 4.44 years
3.
Year
Cash Flow
PV Factor Formula
PV Factor @ 9 %
PV
0
$ (251,000)
1/(1.09)^0
1
$ (251,000)
1
$ 48,000
1/(1.09)^1
0.917431193
$ 44,037
2
$ 53,500
1/(1.09)^2
0.841679993
$ 45,030
3
$ 75,600
1/(1.09)^3
0.77218348
$ 58,377
4
$ 95,500
1/(1.09)^4
0.708425211
$ 67,655
5
$ 126,700
1/(1.09)^5
0.649931386
$ 82,346
NPV
$ 46,445
Net Present Value = $ 46,445
[PV factor is calculated using discount rate as the tables are not uploaded]
Year
Cash Flow
‘Cum Cash Flow
0
$ (251,000)
$ (251,000)
1
$ 48,000
$ (203,000)
2
$ 53,500
$ (149,500)
3
$ 75,600
$ (73,900)
4
$ 95,500
$ 21,600
5
$ 126,700
$ 148,300
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