Q5PSA
ExpertverifiedSentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $250,000 and will yield the following expected cash flows. Management requires investments to have a payback period of three years, and it requires a 10% return on investments.
Period Cash Flow
1 . . . . . . . . . . . . $ 47,000
2 . . . . . . . . . . . . 52,000
3 . . . . . . . . . . . . 75,000
4 . . . . . . . . . . . . 94,000
5 . . . . . . . . . . . . 125,000
Required
1. Determine the payback period for this investment. (Round the answer to one decimal.)
2. Determine the breakeven time for this investment. (Round the answer to one decimal.)
3. Determine the net present value for this investment.
Analysis Component
4. Should management invest in this project? Explain.
The payback period is 3.8 years and the breakeven time is 4.6 years and the net present value is $33,864.
Year  Cash Inflow (outflow)  Cumulative net cash inflow (outflow) 
0  $250,000  $250,000 
1  47,000  203,000 
2  52,000  151,000 
3  75,000  76,000 
4  94,000  18,000 
5  125,000  143,000 
 $143,000 

Calculation of the payback period:  
Payback occurs between years:  3  And year  4 
Calculate the portion of the year: 



The payback period will be 3.8 years.
Year  Cash inflow (outflow)  Table factor  Present value of cash flows  Cumulative present value of cash flows 
0  $250,000  1.0000  $250,000  $250,000 
1  47,000  0.9091  42,728  207,272 
2  52,000  0.8264  42,973  164,299 
3  75,000  0.7513  56,348  107,951 
4  94,000  0.6830  64,202  43,749 
5  125,000  0.6209  77,613  33,864 
 $143,000 



Breakeven time occurs between year: 4 and the year 5
Breakeven time = 4.6 years
The management should invest in the project as the project has a net present value of $33,864 and the breakeven time is 4.6 years.
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