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### Financial & Managerial Accounting

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

# Retsa Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $800,000 and will yield the following expected cash flows. Management requires investments to have a payback period of two years, and it requires a 10% return on its investments.Period Cash Flow 1 . . . . . . . . . . . .$450,000 2 . . . . . . . . . . . . 400,000 3 . . . . . . . . . . . . 350,000 4 . . . . . . . . . . . . 300,000Required 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. 5. Compare your answers for parts 1 through 4 with those for Problem 24-5B. What are the causes of the differences in results and your conclusions?

The payback period is 1.9 years and the break-even time is 2.2 years and the net present value is $407,510. This project should be accepted and the values are opposite of which are given in 24-5B. 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 -$800,000 -$800,000 1 450,000 -350,000 2 400,000 50,000 3 350,000 400,000 4 300,000 700,000$700,000
 Calculation of the payback period: Payback occurs between years: 1 And year 2 Calculate the portion of the year:

The payback period will be 1.9 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 -$800,000 1.0000 -$800,000 -$800,000 1 450,000 0.9091 409,095 -390,905 2 400,000 0.8264 330,560 -60,345 3 350,000 0.7513 262,955 202,610 4 300,000 0.6830 204,900 407,510$700,000

Break-even time occurs between year 2 and the year 3

Break-even time = 2.2 years.

The management should invest in the project as the project has a net present value of $407,510 and the break-even time is 3.07 years. ## Step 5: Comparison  24-5B 24-6B Causes 1 2.4 years 1.9 years The cash flow was higher in the beginning and lower in the ending in 24-6B and vice versa in 24-5B 2 2.8 years 2.2 years The cash flow was higher in the beginning and lower in the ending in 24-6B and vice versa in 24-5B 3$369,840 \$407,510 The cash flow was higher in the beginning and lower in the ending in 24-6B and vice versa in 24-5B 4 Yes Yes Both the project should be accepted

Conclusion: In the problem, 24-5B values of cash flow are lower in the beginning and got increased but in the problem 24-6B the values are opposite of that of problem 24-5A.