Suggested languages for you:

Q5PSA

Expert-verified
Found in: Page 1090

### Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

# Sentinel 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 break-even 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 break-even time is 4.6 years and the net present value is $33,864. See the step by step solution ### Step by Step Solution ## Step-by-Step SolutionStep 1: Computation of payback period  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.

## Step 2: Break-even time for the investment

 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

Break-even time occurs between year: 4 and the year 5

Break-even time = 4.6 years

## Step 4: Should be invested

The management should invest in the project as the project has a net present value of \$33,864 and the break-even time is 4.6 years.