Bower Co. is reviewing a capital investment of $50,000. This project\'s projecte

Question

Bower Co. is reviewing a capital investment of $50,000. This project's projected cash flows over a five year period are estimated at $20,000 each year. A. Calculate the payback period. B. Calculate the break-even time. Assume a 12% hurdle rate and use the table below: Periods Present Value of 1 at 12% 1.......... 0.8929 2.......... 0.7972 3.......... 0.7118 4.......... 0.6355 5.......... 0.5674 C. Using the results in A and B, make a recomendation for the project.

Explanation / Answer

A)For year 1: PV = 20000*0.8929 = 17858 50000-17858 = 32142 For Year 2: PV = 20000*0.7972 = 15944 32142-15944 = 16198 For Year 3: PV = 20000*0.7118 = 14236 16198-14236 = 1962 For Year 4: PV = 20000*0.6355 = 12710 1962-12710 = -10748 So it should be in between 3 and 4 years (1962,3) and (-10748,4) y-3 = (1/(-10748-1962))*(x-1962) x = 0 =>y = 3.1543666 Years.....Payback period. B)This is also equal to break even time. C)Based on results A and B we can have a go ahead recommendation for the project.

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