Q6PSB
ExpertverifiedRetsa 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 . . . . . . . . . . . . 300,000
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.
5. Compare your answers for parts 1 through 4 with those for Problem 245B. What are the causes of the differences in results and your conclusions?
The payback period is 1.9 years and the breakeven 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 245B.
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.
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 



Breakeven time occurs between year 2 and the year 3
Breakeven time = 2.2 years.
The management should invest in the project as the project has a net present value of $407,510 and the breakeven time is 3.07 years.
 245B  246B  Causes 
1  2.4 years  1.9 years  The cash flow was higher in the beginning and lower in the ending in 246B and vice versa in 245B 
2  2.8 years  2.2 years  The cash flow was higher in the beginning and lower in the ending in 246B and vice versa in 245B 
3  $369,840  $407,510  The cash flow was higher in the beginning and lower in the ending in 246B and vice versa in 245B 
4  Yes  Yes  Both the project should be accepted 
Conclusion: In the problem, 245B values of cash flow are lower in the beginning and got increased but in the problem 246B the values are opposite of that of problem 245A.
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